Fed Remains On Pause Due To Jobs Report
Consumer Sentiment & Jobs Report
U.S. consumer sentiment declined as concerns over tariffs and the already high cost of living dampened confidence. The January Jobs Report indicated a slowing yet resilient labor market, with unemployment moving to 4%. Wage growth accelerated, contributing to higher bond yields, as rising wages put further pressure on inflation. Given persistent inflation concerns and a solid jobs report, the Fed will likely remain on hold for the foreseeable future.
As we’ve noted before, inflation doesn’t simply disappear. Once prices rise, they rarely decline, requiring wages to grow gradually over time to offset higher costs. However, the post-COVID inflation surge has created “sticky inflation,” the cumulative rise in the cost of goods and services will take years for incomes to catch up. This presents a key challenge for the Fed, reinforcing the likelihood of interest rates staying higher for longer.
Treasury & Interest Rate Outlook
Treasury Secretary Bessent signaled a focus on lowering long-term Treasury yields, particularly the 10-year, currently at 4.6%, rather than reducing short-term rates. However, the term premium between short- and long-term rates is already tight, limiting flexibility unless an inverted yield curve is the goal. His strategy appears to hinge on deficit reduction, energy cost management, and economic growth to bring long-term rates down, which could lead to lower short-term rates.
From our perspective, interest rates are not unreasonably high, given the current 3% GDP growth and 3% inflation environment. The bigger issue remains government spending, which likely contains far more inefficiencies than initially assumed. If spending is significantly reduced, bond yields could fall sharply. The effectiveness of this approach remains to be seen.
