The Fed pares back its forecast for rate cuts – The Daily Tearsheet

Vital Statistics:

Stocks are flattish this morning as investors return from the Juneteenth holiday. Bonds and MBS are down.

As expected the Fed maintained interest rates at current levels, and cut its forecast for the number of rate cuts in 2025 again. If you look at the consensus dot plot, it seems there are two major groups: those that think the Fed won’t cut rates at all this year, and those that think the Fed will deliver two cuts:

In the table of economic projections, they took down their estimate for GDP growth from 1.7% to 1.4%, and bumped up their estimate for end-of-year core PCE growth from 2.8% to 3.1%. The estimate for unemployment was raised from 4.4% to 4.5%. In the press conference, Jerome Powell said the Fed expects a “meaningful” amount of inflation in the coming months.

Meanwhile Trump expressed his disappointment in Powell, saying: “What I’m going to do is, you know, he gets out in about nine months, he has to, he gets fortunately terminated … I would have never reappointed him, (President Joe) Biden reappointed him. I don’t know why that is, but I guess maybe he was a Democrat… he’s done a poor job,” Trump said. FHFA Director Bill Pulte said that Powell should resign.

Powell cites the strength of the labor market as his justification for keeping policy tight. Fair enough. That said, if you focus solely on one data point in the labor market – the unemployment rate – the labor market looks strong. But if you peek behind the curtain, the internals paint a different picture. Job growth has been driven by demographic statistical adjustments and not paychecks, while previous months have been quietly revised downward. The declining unemployment rate is being driven by a decrease in the labor force, which is not the way you want to do it. It isn’t job growth that is driving it – it is discouraged unemployed workers throwing in the towel.

I think the Fed has gone from its role of reacting to data to one where it is making bets, and that really isn’t their bailiwick. It would be one thing if the Fed Funds rate was at r* or the neutral rate, but it isn’t. The Fed is 100 basis points over r* when the current economic data says they should be neutral. At this point the Fed needs inflation to spike or else they will be making a major policy mistake. Powell is essentially drawing into an inside straight.

Bayview Asset Management is buying Guild Mortgage for an equity value of $1.3 billion. In the latest 10-Q, Guild is valuing the servicing portfolio for the same amount, so Bayview is paying little for the retail origination arm.

“Expanding the Guild relationship with Lakeview creates one of the strongest and most compelling mortgage origination and servicing ecosystems in the nation,” said Guild Chief Executive Terry Schmidt. “Our expertise in distributed retail origination, retained servicing, and the customer-for-life balanced business model makes this a complementary partnership that has powerful potential for growth and innovation.”

“We are pleased to forge a stronger strategic partnership between Lakeview and Guild through this transaction, and look forward to expanding opportunities and delivering exceptional service to our customers,” said Juan Gonzalez, Managing Director and CEO of Lakeview Originations. “With each company’s different strengths and areas of expertise, this collaboration will form one of the most dynamic mortgage origination and servicing platforms in the industry.”

“We are excited for this next chapter of the Guild story,” said Guild Holdings Chairman Patrick Duffy. “The entire board of directors is confident that Bayview will be an excellent steward of this exceptional company and a great platform for continued growth.”