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Barry Habib: It was a wild day in the bond market yesterday, as a lot of Fed days are very volatile, especially with the Fed’s, with the Fed’s press conference that occurs. Well, we got the hike. Bond market liked it. Yields moved lower. But then as Kevin Warsh started to go into his press conference, there were comments that the bond market did not like, and we saw yields reverse course, give up their gains. I guess they still have not found what they’re looking for, but we are going to break it all down for you, so you got it.

Good morning, everyone. Mortgage bonds are improved, yields are improved, kind of getting close to the levels that they were at right around the time of the Fed rate hike. But spoiling the party were comments from Kevin Warsh. So this could be very confusing. Did the bond market like the hike or did they not? It had gains and then gave them up. So let’s take a quick look here and break down what went on. We’re going to show you actually a timeline.

But first, let’s look at the Fed’s comments so that you’ve got this down, because as the old I Love Lucy episode, we go with Ricky Ricardo. He says, “You got some explaining to do.” There’s a lot of explaining to do for our clients and for our referral partners, so they understand this. So let’s take it apart step by step.

Let’s start off with the Fed. Their statement: they, first of all, unanimously hiked. It’s important that it was unanimous. 25 basis points, up to 3.875%. As I mentioned, the bond market liked that. I will show you that. But then the Warsh press conference began at 2:30, and then as he got going, at around 2:45, yields began to rise. We lost pricing in mortgage-backed securities.

Why? Well, he said he feels we are not restrictive. Now, what does that mean? That’s, you know, Fed speak. So let’s dissect it. That means likely more hikes to come. Well, maybe we don’t like that so much. But here’s a big one: this hike will not necessarily improve inflation readings. So we want it to improve inflation readings, but it might not. And that was a big concern.

The other one is this one: the summer inflation readings do not show that underlying trends have meaningfully improved. So this really is something, we were looking at some of the things that looked a little bit better. We know that the last inflation report that we got, you know, was a little bit more sour in certain areas, but not overall. And then, of course, when we dismiss the data points that the doves were hanging their hopes on, that really took the argument to a level that the bond market didn’t like.

Like those moderating CPI readings, that it was predominantly driven from oil, and that’s not going to be sensitive to rate hikes. The shelter readings have been improving. The lackluster job gains outside of last month. You know, August was a good number, but that’s notoriously one that gets revised lower. And then no hat tip to the portfolio management fees, which we know are artificially driving inflation higher, but are also going to be revised in the next report.

Now, let’s take a look at the timeline so we can walk you through. Here’s a 15-minute chart of the 10-year. So let’s see where we were. We had gotten off to a good start. Yields were declining, declining right into the Fed meeting, where we had gotten all the way down to 4.94 when we got the Fed rate hike, which was great, because this was exactly at 2 o’clock. We got all the way down here, and then Warsh starts speaking right at 2:30. That yield went back up to 4.96, but was still below 5%, where we started the day. So the bond market liked it. We had preserved a lot of the gains in MBS as well.

But then what happened here? Notice the big move up in the 10-year. That started at 2:45 to 3 o’clock, where Warsh’s comments had hit the market, and that drove yields up, right here in this area, to 5.01. So you could see it was definitely, as we had broken down for you, those comments that the market did not like. And Dan, why don’t you walk us through the Summary of Economic Projections?

Dan: Yes, we get this every other meeting. This is where 18 of the 19 Fed members do things like the dot plot chart and give their projections. Warsh, again, omitted his, but we’re only going to look at these numbers for 2026, because it really doesn’t help to look past that, because with data coming in, it changes so much.

So let’s first start with the dots plot. This is where the Fed members anonymously put where they think the Fed funds rate is going to be this year. And by and large, most of them think there’s going to be at least one more hike. 12 of them, in fact, want one more hike this year. Four of them want two hikes. Two of them want to pause the rest of the year. And as I mentioned, Warsh omitted putting his dot in there. So the median here is that Fed members as a whole think there’s going to be one more hike in 2026.

And then on the unemployment rate, they downgraded their previous forecast that was given in the last SEP from 4.3 to 4.1%. Now, the last unemployment rate we got was that 4.1%, so they think it is going to stay there. But these were certainly, you know, some more hawkish plots on the dot plot.