Do’s & Dots

The Federal Reserve concludes its two-day meeting today, with markets virtually certain that rates will remain unchanged in the 4.25% - 4.50% range—marking the seventh consecutive month at this level. While the rate decision itself holds no surprises, traders are positioning for nuance. Bloomberg reports that savvy investors have taken long positions, anticipating Chair Powell will adopt a more dovish tone that signals future rate cuts. The real risk lies in the updated dot plot projections. A hawkish shift showing fewer anticipated cuts would likely disappoint both Fed watchers and markets, potentially triggering volatility despite the expected rate hold.

Economic fundamentals suggest the Fed will eventually ease policy as growth moderates in the second half of 2025, down from the current 2% pace. The recession narrative has largely faded, with even previously bearish economists revising their outlooks upward. This shift reflects underlying economic resilience that has surprised many forecasters throughout the cycle. For the latter half of 2025, expect GDP growth to decelerate to a more sustainable 1% - 1.5% range—a pace that should provide the Fed with sufficient justification to begin cutting rates without signaling economic distress.

When the Fed does resume its easing path, I expect:

- Treasury rates to decline approximately 50 basis points over that year, with short-term yields leading the decline as the market prices in policy normalization.

- Refinancing activity to accelerate across high-yield and broadly syndicated loan markets as credit spreads tighten and all-in borrowing costs fall.

- Corporate earnings growth to initially slow alongside GDP deceleration, then recover modestly once Fed easing begins to support economic activity.

- M&A activity to rebound significantly as companies that have been hoarding cash and preserving liquidity regain confidence to deploy capital.

- Capital expenditure to increase meaningfully

—a long-overdue development that's critically needed.

- Housing market activity to strengthen as lower mortgage rates improve affordability and unlock pent-up demand. 

- Financial and technology sectors to outperform given their sensitivity to funding costs. 

- Credit market conditions to improve broadly, driving increased demand for private credit while reducing default risks across industry sectors.