Good Tuesday AM, from your Hometown Lender,

Not much economic news to share today. There was a 10yr treasury auction which went well. Markets though are remaining coiled waiting for tomorrow’s Fed statement and press conference. There is no chance of a rate cut tomorrow but the commentary will move markets for the next few weeks. If the Fed hints at a rate cut to come in the June meeting (currently around a 30% chance according to the CME Group), rates on borrowing products like mortgages could, theoretically, decline. That’s because the markets and lenders don’t need to wait for formal Fed action to start adjusting their rate offers. They can and often will change them preemptively, particularly if a cut for when the Fed meets again on June 17 and June 18 appears imminent. And with inflation steadily cooling in recent months and unemployment levels steady, there may be enough motivation for the Fed to take rate-cutting action before summer.

Here was a good commentary from the WSJ. Food for thought…

The 19 or so members of the Federal Open Market Committee begin a two-day meeting in Washington today that should result in them doing…absolutely nothing. Lunch and light refreshments will be served. Kidding aside, Fed Chair Jerome Powell’s job has probably never been harder. Political pressure from President Trump to cut rates isn’t the reason. He faces a dilemma: Amid clear reasons to fear an economic slowdown, actual labor-market data is telling him to stand pat.

It could keep saying that longer than traders expect.

The odds of a rate cut being announced tomorrow were as high as one-third a month ago, in the immediate aftermath of the “Liberation Day” shock, according to CME FedWatch. Now they’re nearly zero. The market-implied odds of at least one cut are now one-third by the FOMC’s June meeting and 80% by July. But an economic indicator Powell watches closely, unemployment, could stay low even if the recent pace of payroll growth slows. The U.S. added 177,000 jobs in April, topping forecasts, and a revised 185,000 in March. Assuming no change in the labor force participation rate, an average of just 112,000 jobs a month might keep unemployment steady at today’s 4.2% for the next year, according to a calculator from the Federal Reserve Bank of Atlanta. And if participation merely fell back to where it was in February then a measly 69,000 jobs a month would keep unemployment stable.

There’s reason to expect participation to fall: Baby boomer retirements have put it in steady decline and an immigration crackdown adds more pressure. Immigrants’ participation rate is about five percentage points higher than for native-born Americans. Only people actively seeking work can be considered unemployed. And then there’s the unusual nature of this hit to the economy. It wasn’t in the federal government’s power to switch off the financial crisis or the Covid-19 pandemic, both of which spurred aggressive Fed action. But the White House could ease tariffs with the stroke of a pen. And, unlike those shocks, tariffs spur inflation.

The Fed’s “dual mandate” is maximum employment and stable prices. Stock and bond investors counting on a helping hand from the Fed aren’t likely to get one soon unless other hard indicators of economic activity show a clear slowdown. Slumping confidence isn’t enough. Goldman Sachs economists reckon it will be “a couple of months” before Fed policymakers will need to cut, and probably by just a quarter point. Can something else sway them? Barring a horrific jobs report in June, signs of distress from some important companies might do the trick.

Stay safe and make today great!