What to expect when expecting a rate cut — While we didn’t hear from Federal Reserve policymakers last week due to the customary blackout ahead of a Federal Open Market Committee (FOMC) meeting, a rate cut at this week’s meeting is almost guaranteed. The only unknown variable is whether the rate cut will amount to 25 basis points (bps) or more, but the odds are heavily in favor of the former.
Figure 1 shows the last eight easing-cycle policy-rate changes over a three-year horizon (economies tend to heal roughly at that watermark). The dashed line illustrates the tepid accommodation that the current easing cycle has experienced—similar to the paths taken in 1989, 1995, and 2019.
As Figure 1 shows, the Paul Volker era (1979 to 1987) and the period shortly thereafter were characterized by large moves in the Fed’s policy rate. The FOMC was quick to cut, and did so with purpose, often decreasing rates by 200 bps at a time. However, more recent monetary policy generally lowered rates in smaller increments. Nevertheless, then as now, rate rises (visible in the right half of Figure 1) tend to be less aggressive to minimize the risk of prematurely tipping the economy into recession.
Today’s economic cycle is following the path of the late 1980s and mid 1990s—not long after Heidi Murkoff wrote her bestseller “What to expect when you’re expecting,” which we presume was about rate cuts, but we recognize we might have missed the point of the book. While many market pundits and economists now insist that “this time is different”—citing geopolitical turmoil and technological change like artificial intelligence—so far this cycle is playing out very much in line with historical norms. Take jobless claims, for example, which occur due to an individual following their real economic incentive (versus a survey like NFP) to claim funds to help bridge the gap between employment opportunities.
Labor market downturns tend to accelerate quickly, similar to a snowball as it rolls down a mountain. Figure 2 shows how job separations tend to increase in magnitude tremendously in the first two years after an initial rate cut (we omitted the pandemic year due to the degree of losses, which skew the chart). Current jobless claims are behaving similarly to those seen in the late ‘80s and mid ‘90s.
There is obviously a difference between these two previous cycles. The labor market was not as negatively affected in the mid ‘90s—which, in turn, did not require additional monetary accommodation. Currently, jobless claims lie somewhere between these cycles. Yet the outlook for monetary policy will depend on how claims, and more broadly, the labor market, play out in the months ahead.
Meanwhile, the numbers released by the Bureau of Labor Statistics (BLS) have been under more scrutiny recently. Last week, for example, the BLS revised job gains downward by nearly one million from March 2024 to March 2025. While the headline figure was the largest downward revision in history, the path of job gains is, in fact, less of a diversion from historical norms. Figure 3 shows that job gains tend to slow in post-tightening phases (to around 1%, on average). Today, job gains are rising at 0.93%. Figure 3 also shows that
the growth rate in job gains turns negative in easing cycles (to around -2%). This has yet to happen either.
One of the operative points here concerning a potential rate cut is the pace of inflation. So far, inflationary pressures are following historical norms but are not decreasing as quickly as policymakers would prefer. Perhaps due to this reason, the current monetary policy cycle may have a much shallower path of rate cuts than some are hoping for, barring any major decline in the labor market.
The market is now pricing in fewer than 300 bps in total cuts for the current cycle (Figure 5), with under 200 bps remaining over the next two years (again mimicking the earlier cycles of late ‘80s early ‘90s. The historical precedence and watermarks from past inflation and labor market patterns suggests that monetary policy may be adjusting at the right pace: Inflationary pressures are on the higher end of the historical range, while job losses are on the lower end. Further deterioration in the labor market—which seems somewhat inevitable given the momentum that has been building—likely requires additional accommodation. And the magnitude of that accommodation probably isn’t too far off from the current market expectation of less than 200 bps.
FROM THE DESK
Agency CMBS — Optimism continues in our market. A large 232 traded last week ($170+ million) on top of multifamily levels, indicating strong demand for project loans. Spreads were broadly flat across the board.
Municipals — AAA tax-exempt yields were significantly lower throughout the yield curve, week over week. According to Bloomberg, the municipal bond market surpassed $400 billion of new-issuance sales this year, the fastest pace since 2014. (Issuance is up approximately 16% compared to this time last year, itself a record year for issuance.) Some market participants are now projecting up to $570 billion to be issued in 2025. Municipal bond funds saw a four straight week of inflows, with $2.18 billion (YTD inflows of $16 billion), while high-yield funds saw inflows of $1.06 billion. Such a large inflow last week was possibly due to an asset reallocation into municipal bonds from a specific firm (or firms).
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