History looks to repeat itself — Since Bruce Springsteen, Madonna, and way before Nirvana, the FOMC has not had two governors dissent from the committee’s decision on monetary policy. Bowling for Soup wrote the song “1985” in a nod to nostalgia and this past week, we opened a similar time capsule, but the year was 1993.
The last time the FOMC experienced a double dissent from governors was in late 1993. During that meeting, the dissenting governors favored tighter monetary policy; at the subsequent FOMC meeting in 1994, the Fed followed through and hiked rates by 25 basis points (bps).
This time, however, the language in the FOMC’s latest statement appeared to crack open the door for a September rate cut. Then Friday’s jobs report stormed right through that door, with the probability of a cut increasing from around 40% to 87%, per federal funds rate futures.
According to the Labor Department, U.S. nonfarm payrolls slowed dramatically over the last three months— as seen in both the weaker headline figure for July (73,000 vs. 104,000 consensus expectation) and the large downward revisions to the prior June and May prints, which subtracted 258,000 jobs in aggregate. The nonfarm payroll gain was reduced to only 19,000 in May and only 14,000 in June, while the combined effect pushed the average monthly gain during May through June to a meager 35,000, the lowest three-month average since 2020. Meanwhile, the unemployment rate ticked up from 4.1% to 4.2%.
That shift in tone on economic growth is key in estimating the timeframe for the next rate cut. As recently as the June FOMC meeting, Fed officials said that economic activity “has continued to expand at a solid pace.” Yet that rhetoric has now been replaced with “growth of economic activity moderated in the first half of the year.” The downgrade in economic outlook could, in turn, lead Fed Chair Jerome Powell, as he has done in the past, to use his Jackson Hole appearance on August 22 to vocalize a change in FOMC sentiment.
Inflation is still the operative point here, though: There will be two Consumer Price Index (CPI) prints between now and the next FOMC meeting on September 17. Inflation swaps show that investors expect the CPI to accelerate in the next few months above 3%. So, if the Fed were to cut in September, it would need the labor market to deteriorate further to justify the move.
Bank of America’s Aditya Bhave expressed his view on Bloomberg TV (albeit before the labor number release) of no more cuts this year. “Even if Waller’s right that tariffs aren’t really that big a deal, you still have an inflation problem,” said Bhave. “And I think the Fed is not still appreciating that enough.” Tariff-induced goods inflation can be a problem, as exporters are not paying most of the price increases. June’s CPI report hinted at this, suggesting that consumers are the ones lifting the burden. (We also mentioned the recent rise in goods inflation over recent inflation prints in the July 21 Talking Points).
Powell, for his part, said that changes to government policies continue to evolve and their effects on the economy remain uncertain. A “reasonable” base case is that the bump in inflation from tariffs will prove “short-lived … reflecting a one-time shift in the price level,” said Powell. Higher tariffs have begun to show up in some prices of goods, but the overall effect on the economy and inflation “remain to be seen,” Powell added. Powell said that, for now, it seems that tariff costs are being borne mostly by companies and retailers. But tariff costs are also starting to show up in consumer prices, and “we [the Fed] expect to see more of that.”
Until last Friday, Powell could safely make the claim that any delay in monetary easing has not unduly harmed the labor market. “It seems to me, and to almost the whole committee, that the economy is not performing as though restrictive policy is holding it back inappropriately,” argued Powell. However, the July jobs report and the May and June revisions to said reports threw a wrench into Powell’s claims. Indeed, the labor market softening over the last three months—which Powell denied but the two lone dissenters (Christopher Waller and Michelle Bowman) called out—was clearly made evident by Friday’s report.
As Powell has repeatedly claimed, his focus and (that of the FOMC) is on data. With this new data, as well as growing dissent within the committee, markets now expect with a high degree of certainty that September’s FOMC meeting will conclude with the first rate cut since December 2024.
FROM THE DESK
Agency CMBS — Origination volume was much heavier last week than in the previous two weeks. This was due, in part, to the typical month-end push, as well as lower Treasury yields following the June jobs report. New-issue Fannie Mae DUS volume surged to more than $1.7 billion last week—about $500 million above the prior week and $600 million above the recent four-week average. Fannie spreads were one to three bps wider on five-year through 10-year tenors; five-year rates suffered more due to market saturation from months of large supply on the short end of the maturity spectrum. Ginnie Mae spreads tightened all week, even into higher volumes on Friday following the Treasury rally.
REMIC issuers dominate the investor base for Ginnie Mae project loans. These issuers are finally getting more interest in their tranched REMIC bonds from banks and other end-account buyers. Ginnie Mae REMIC bonds have been mostly out of favor since the regional bank collapses in 2023, so the increased demand (and tighter spreads) is a welcome change.
Municipals — AAA tax-exempt yields were nine to 11 bps lower through the yield curve, week over week. Huge volumes continue to be the primary storyline in the municipal market. July’s new issue volume of $53.7 billion was the second highest monthly mark this year (after $57.2 billion in June) and represents the fourth straight month above $50 billion. Through July, $332 billion of new issue paper has hit the muni market—$55 billion (or almost 20%) more than the same time last year. 2025 is on course to overtake 2024 as the highest annual municipal bond volume in U.S. history.
However, wider investor spreads frequently follow higher volumes—and that was apparent last week. In our space, shorter-term structures like two- to four-year cash-collateralized bonds for affordable housing projects continued to trade well (around five bps wider), week over week. But longer-term structures such as 17- to 19-year Fannie Mae and Freddie Mac-enhanced bonds traded five to 15 bps wider, week over week.
The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.
