I am sure you all have seen that the Fed cut rates 0.25% this week after seeing weaker job creation over the summer months. The Fed voted 11-1 on the decision so the political noise did not divide the committee, however, there is a wide dispersion on their outlook.
Four times per year, the Fed releases a dot-plot where each policymaker provides their view on future interest rates and economic conditions and we got one on Wednesday – see below.
If this is your first time looking at the dot-plot, I can tell you that there is an unusually wide dispersion among the committee members on their outlook of the Fed funds rate thru 2028. This highlights the uncertainty of the economy right now as the Fed wrestles with tamping down inflation while not killing the labor markets. A tough job right now.
Several members expect the Fed funds rate to drop below 3.00% in 2026 and notable is the range for 2027 is a low of 2.25% to a high of 4.00%. This means the debate on interest rates will continue and that every payroll and inflation reading will continue to be closely scrutinized. For 2025, there are several dots in the 3.50%-3.75% range so it is very possible we see two more 25bp rate cuts by the end of the year. Stay tuned.
The Shape of the Yield Curve
Bond professionals are more concerned with the shape of the yield curve as it can foretell if the economy is about to make a change for the better or worse.
A steep yield curve signals expectations of economic growth and rising inflation in the future (generally seen in good times). Steep yield curves have preceded periods of robust growth, like the mid-2000s or post-recession recoveries. However, an excessively steep curve could also warn of overheating or potential inflationary pressures that would cause the Fed to raise interest rates.
An inverted yield curve, where short-term interest rates exceed long-term rates, is often a significant economic indicator. Historically, an inverted yield curve has preceded most U.S. recessions since the 1950s, including those in 2001 and 2008. It suggests investors expect weaker economic growth and deflation, leading to lower long-term yields.
However, the predictive power isn’t absolute. The lag between inversion and recession can vary (6-24 months), and not all inversions lead to recessions (e.g., mid-1990s). Current economic factors, like employment or consumer spending, should be considered alongside the curve. For instance, recent data as of September 2025 shows mixed signals, with some analysts noting persistent inflation concerns despite occasional inversions. Yet, no recession.
The Current Shape of the Yield Curve
If we marry the two graphs above we get the current shape of the yield curve below. The left side is inverted and the right side is steep. So, this signals that things are complicated right now. I expect that the Fed will keep cutting down to 3.75% and that we will see 10Yrs rise so that the shape of the curve is steep which would signal growth with inflation levels running above the Fed’s 2% target.
Stocks Like Rate Cuts
The S&P 500 kept moving higher this week and there remains a great deal of skeptisism about what happens next. For now, it looks the S&P is pointed higher and the next wall of resistance will be near 7000.
One thing to consider is that historical performance shows the remainder of September as one of the weakest seasonal times of the year as managers rebalance portfolios and trim positions in preparation for Q4. So, we will see in the coming sessions whether equities can buck that trend this year.
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President, Kisco Capital
