The Fed hawks are winning even without a rate hike

To hike or not to hike? That is the question being discussed today as the Fed’s two-day meeting is underway, but I would argue that the Fed hawks have already effectively gotten their rate hikes in the system and are smirking at Fed Chair Kevin Warsh.

Normally by now, the markets are 100% sure if a rate hike will or won’t happen, but it’s still a toss-up. We also have a new sheriff in town, Warsh, and that sheriff has a boss that demands loyalty. Yesterday, President Trump made his standard comments about interest rates in comments to reporters.

“We should have the lowest interest rate in the world, like it used to be 30 years ago,” Trump said.

Now that is a very common line the president says often, but this next one is key.

“Kevin’s fantastic, but he’s got a board, and the board members are very political, I would say,” Trump said. “He wants to do the right thing. I know what he wants to do.”

President Trump believes that Warsh wants to cut rates, but the Fed board members are hostile toward his goal.

So let’s take a look at where we are before the Fed announcement tomorrow because I believe the Fed hawks already got what they wanted, as the bond market did the heavy lifting for them.

Bond market has already done a lot of work

Even if we don’t get a rate hike tomorrow, the bond market has done the Fed’s work for them, and this alone can make them slightly less hawkish. As I write this article, here are the bond market yields this morning and what the lows were in the year:

• 10-year yield 4.60%; the lows were 3.94%
• 2-year yield  4.30%; the lows were 3.37%
• 3-month yield 3.88%; the lows were 3.60%

Since late 2022, we have had a lot of times when the 10-year yield gets below 4%, and it was never because of Fed policy. It’s because there was an economic/labor growth scare and money went into bonds, as the bond market believed the Fed was behind the curve. Every time that has happened, bond yields rose, even though the labor market wasn’t breaking. Today, it’s the opposite; the bond market believes the Fed wants to be hawkish and that the labor market isn’t breaking, so bond yields have risen a lot.

As you can see below, we had epic moves in bond yields and the Fed funds rate never budged during this entire time. This is very common in a calendar year when we have a lot of economic chaos. When the 10–year yield was under 4%, it was during the height of the “AI will take all the jobs” drama. Now we have an extreme hawkish Fed tone and the labor market is stable in the Fed’s eye for now.

Conclusion

I don’t see the Fed doing a rate hike tomorrow because the labor data came in a tad softer recently; even today’s ADP report showed the fifth straight week of softer labor, and the inflation report that some Fed Hawks were basing their rate hike on came in softer.

The Iran conflict was the wild card, since Iran 2.0 oil prices did rise but are back below $79 again. So, we shouldn’t get a rate hike tomorrow, but does that even matter? The Fed hawks already got what they wanted; they won. The easing bias is all gone; nobody is talking about rate cuts until the labor data gets weaker and the Iran conflict is something that some Fed officials might believe can’t be solved in a clear way anytime soon.