Quiet After the Quake
The current politics crises again point to the importance of clever cash investing.
Historically, those who maintained unleveraged positions and proactively de-risked their portfolios were the ones best positioned to endure market turmoil and emerge stronger on the other side.
Three Cuts in 2025
We expect the Fed to reduce rates three times in 2025 — in June, September and December — although there could be a lot of turbulence in the year, with the current political machinations.
Persistent political noise (tariffs, in particular) appears to be deflecting attention from more critical budgetary debates in Washington. The budget should prove to be the most critical aspect of growth in this economy.
The two-year US Treasury yield is forecast to remain anchored near current levels through 2025, with a modest 20 bp decline expected by the end of 2026. This suggests a market reassessment of the long-term neutral rate, now seen to be materially higher than the previously assumed 2.5%.
The Fed’s policy rate is projected to be 3.5% by end-2025. The 2s10s yield curve is anticipated to steepen, supporting the view that 10-year yields are near fair value.
US growth, as measured by Bloomberg’s economic surveys, has weakened since 2 April.
SSGA’s gross domestic product (GDP) forecast has declined in line with overall market sentiment. GDP is forecast at 1.7% through Bloomberg surveys and SSGA’s is slightly lower at 1.5%.
Inflation should also remain sticky: Personal consumption expenditures (PCE; headline and core) are projected at 2.5% through 2025 and are expected to decline in 2026 and 2027. There is no question that the impact of tariffs will create significant disruption in the business community as it tries to determine what works in the new price environment. Unemployment is expected to rise only slightly, reaching 4.3%, underscoring the durability of the labor market.
Another 50-bp Cut by European Central Bank (ECB)?
The ECB, having already eased by 175 bp — 75 bp more than the Fed — is expected to deliver another 50 bp in cuts before pausing. Growth in Europe is forecasted to come in at 1.2% in 2025 and improve to 1.5% in 2026. Sovereign yields appear stable, with 2-year German yields expected to close 2025 and 2026 slightly below 2.0%. The Bank of England is between a rock and a hard place as inflation forecasts remain elevated in 2025 (3.1% consumer price inflation [CPI]) with growth stubbornly low (0.9% 2025 GDP growth). This makes its path to lowering rates to stimulate growth a tricky one. The 2-year sterling yield is forecast at 3.60% by year-end and 3.25% by end-2026.
Bottom Line
Global central banks are treading cautiously in the face of major geopolitical disruption from the current US Administration. US tariff policy is creating major uncertainty. Inflation is moderating, but not fast enough to prompt aggressive easing. Growth is slowing, but not alarmingly so for the time being. Fixed income markets are pricing in lower policy rates, with no signs of panic yet. With politics disrupting fiscal clarity, especially in the US, the tone remains cautious, though investors would do well to derisk and stay nimble.
We recently had the opportunity to catch up with Todd Bean, Head of Traditional Cash Strategies. Todd answered our questions on changes in Fed’s QT and their potential implications for money market yields. This interview was scheduled for earlier publication but was postponed to address more the pressing topics among cash investors (hint: tariffs).