At an event on Tuesday, Federal Reserve Chair Jerome Powell hinted that rate cuts may not come as soon as investors had hoped given how stubborn inflation has been.
Blake Gwinn, the head of US rates strategy at RBC Capital Markets, thinks that is likely the case too. That's why he reduced his rate cut expectations from three to just one cut in December. Gwinn argues that Fedspeak has changed in recent weeks, with officials no longer framing January's hot inflation report as idiosyncratic.
On the possibility of a rate hike, Gwinn says that the bar for the Fed to hike rates is "very very high" and that the markets aren't really entertaining the idea.
Watch the video above to hear Gwinn's take on how the 2024 election may play a role in the Fed's decision making.
For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.
This post was written by Stephanie Mikulich.
Video Transcript
JULIE HYMAN: No cuts till Christmas or, as I kept hearing in my head all day, "No. Cuts. Till Christmas." I don't know.
JULIE HYMAN: Our next guest thinks that after a string of hotter-than-expected inflation reports. For more, we're talking to Blake Gwinn, head of US rates strategy at RBC Capital Markets. Is that the song you had in your head?
BLAKE GWINN: That's what I was going for. That's perfect, yeah. That was great.
JULIE HYMAN: Yes, I'm glad we were on the same page with that. So, you know, this is sort of the Bostic view, if you will, that perhaps we'll get a cut in the fourth quarter of this year. That's where we're at today. And do you think that Jay Powell was acknowledging that today?
BLAKE GWINN: Yeah. And I think, you know, you said it correctly before. I mean, he's kind of marking to market to some extent. And I think we've already heard a bit of this shift in rhetoric from other Fed speakers since that March CPI print. You know, Collins, Daly, Jefferson today.
So some of the other more kind of centrist members, and even some of the people that tend to lean dovish, you're seeing them kind of back away from this bump in the road narrative where they were kind of trying to write off the January strength and inflation as idiosyncratic, something that was going to correct, get back to that kind of Q4 2023 trend. But I think we've seen those speakers back away from it, and then Powell basically confirmed that shift today. He didn't try I think even once to really kind of sell that January data or the strength that we've seen in Q1 as a bump in the road.
JOSH LIPTON: And are you saying, you know, the one cut you're looking for in December, is that just because November, forget it, just too politically sensitive?
BLAKE GWINN: Yeah. I mean, that's a big part of it. So, we had originally been at three cuts and I've been a big advocate for the fact that politics aren't going to play a role in what the Fed decides to do. That was probably more true when they were going to start that process in June.
I think there's a big gap between continuing a cutting process that's already in place. I think that's very justifiable to the public, to Congress to say, hey, we told you there were going to be three cuts. We started it in June. We're going every other meeting.
You know, it's very defensible. And I think it gets a lot more difficult when you're starting that process right in the heart of the election cycle. And the other thing I would say is that what we've always been talking about is really an adjustment process. It's preventative cuts.
This isn't a forced reaction to deterioration in the data or responding to some kind of exogenous geopolitical shock or something. This was preventative. It's a nice to have. It's not a need to have.
If that's the case, I think starting it and kicking it off right in the middle of the election, it's bringing a lot of potential heat onto the Fed for no real upside. Because in the end, 25 basis points in September, November, it's not going to be the make or break between a hard landing or a soft landing.
JULIE HYMAN: What is, at this point, I mean, if they have kept policy as tight as it has been for as long as it's been now, and it hasn't brought down inflation and we keep seeing these inflation prints, why is leaving it where it is now going to achieve the goal?
BLAKE GWINN: I mean, I think that's a lot of the questions that are being asked. I mean, we put out a piece several months ago just talking about how rate hikes this time haven't really worked the way we thought. And there's some idiosyncratic reasons related to the pandemic.
We had this big wave of fiscal support. I think a lot of people, a lot of businesses were able to term out debt, reduce their exposure to interest rates. So, we had very clean balance sheets coming into this. Fiscal policy kind of remained stimulative.
So, I think there's just a lot of things going on that have kind of dulled the impact that these rate hikes have had. And so, I think part of the rethink going on inside the Fed right now is, what exactly is a neutral policy rate? Is the rate setting that we currently have, is it as restrictive as they once thought that it would be? I think at least with the data we've seen so far, the answer to that would probably be no.
JULIE HYMAN: Right.
JOSH LIPTON: And Blake, just looking at the 10-year here. We backed up to 4.66%. Do you think we test that October high of 5%? Where do you think we had kind of near intermediate term?
BLAKE GWINN: Yeah. So I still lean against testing that 5% level. I think if you think about where we were in August and September of last year, it's definitely a different place. I mean, we were still pricing in some probability of another hike in the cycle. We had this backdrop of Treasury supply.
If you remember, there was a lot of angst about a supply-driven term premium rise. I think that came on the back of that August refunding when Treasury said, hey, deficits-- their announcement showed deficits bigger than expected, funding needs bigger than expected. So, they were also increasing the size of Treasury auctions.
So, I think that kind of served as a backdrop. I don't think the supply itself really matters that much. I think it's more that everybody was concerned about the supply at the same time as you had hot data and possibility of a cut. If you look at now, I think what's different is the bar to another cut is very, very high. I think on the supply side, we're starting to see some--
JULIE HYMAN: Another hike-- the bar to another hike.
BLAKE GWINN: Oh, bar to another hike. I'm sorry. Thank you. So that is very, very high. I don't think we're really entertaining that. It's not really priced in maybe 20%, 30% into markets.
I think on the supply side, you're starting to hear some more discussions around that deficit issue. But we do have a refunding announcement in a few weeks. Our expectation, this is going to be a very strong tax season. If anything, I see possibility that deficit expectations are actually marked down.
And also, at least in our forecast-- and I think Treasury's been fairly clear in communicating this-- they're not increasing their coupon auction sizes for some considerable amount of time. So you kind of take that, I think, out of the backdrop. And I do wonder if that refunding is actually going to help kind of cool markets, help settle us into this kind of new hire range, without really retesting that high from late last year.
JULIE HYMAN: Do you think there's going to be adequate demand for the upcoming auctions? There was a 10-year auction recently that was a little wobbly.
BLAKE GWINN: Yeah, we've had some tails. But overall, I mean, I think even as Treasury has increased all of these auctions, you know, they went on this campaign where they increased auction sizes for multiple quarters. Overall, we've taken it down pretty well. I think you've had some individual auctions that maybe go better or poorer.
But overall, we've come out of those situations with yields in pretty good shape. One of the worst 30-year auctions, I remember everybody said, oh, this is, you know, it had a huge tail. Everybody said, this is it.
We can't take it down. By the end of the week, we were unchanged on 30-year yield. So, it's tough for me to really think that that's a huge problem.
JULIE HYMAN: Makes sense. Blake, thanks for coming in.
