Macro Markets Episode 63: Post-Inauguration/Post-FOMC Analysis—Into the Known Unknown
The new administration has hit the ground running, the Fed held rates steady at its last policy meeting, and markets have been volatile. Matt Bush, our U.S. economist, and Evan Serdensky, Portfolio Manager on our Total Return team, join Macro Markets to discuss evolving economic and investing conditions, as well as recent A.I.-related volatility.
This transcript is computer-generated and may contain inaccuracies.
Jay Diamond: Hi everybody, and welcome to Macro Markets with Guggenheim Investments, where we invite leaders from our investment team to offer their analysis of the investment landscape and the economic outlook. I’m Jay Diamond, head of thought leadership for Guggenheim Investments, and I’ll be hosting today. Before we begin, as always, I want to thank our listeners for tuning in and remind you that if you have any questions for our podcast guests, please email us at macromarkets@guggenheiminvestments.com.
Now let’s get started. As widely expected, the Fed held its policy rates steady at the FOMC meeting, citing a solid, broadly balanced labor market and somewhat elevated inflation. This decision comes at a somewhat tumultuous time in Washington with the new administration coming in, so a potential policy shifts surrounding tariffs, taxes, spending, and regulation raise a little bit of uncertainty about the potential path of inflation growth and market outcomes this year.
The sudden AI related stock selloff and flight to safety in the bond market underscores a certain amount of fragility in the markets. So this seems like a very good time to do a situational gut check on macro markets, and so here to help us do that is Matt Bush, our U.S. economist, and Evan Serdensky, a portfolio manager on our Total Return team. Welcome back, Matt and Evan, and thanks for taking the time to chat with us today.
Matt Bush: Good to be here, Jay.
Evan Serdensky: Thanks a lot for having us, Jay.
Jay Diamond: Of course. Alright, well let’s start with Matt with the most recent developments. Tell us what you learned from the Fed decision at the FOMC meeting and the press conference afterwards. Why did the Fed pause in its rate cutting stretch?
Matt Bush: The Fed paused because they believe that having cut 100 basis points so far, policy is now closer to a neutral setting. And at the same time, some of the fears that they had about the labor market weakening have lessened in recent months as the unemployment rate has stabilized, and so has the jobs data. So they view the path from here as proceeding more cautiously, especially as they wait for a clear signal on policy changes out of the new administration, which do have the potential to add some inflationary pressure.
I think one of the interesting things about Chair Powell’s press conference was his repeated characterization of policy as still being meaningfully restrictive, meaning that he doesn’t see policy as neutral yet, and that’s a fairly strong signal to expect more cuts. Those cuts are likely to be at a slower pace—as Powell emphasized, the committee is in no rush—but it’s still very much their intention to keep bringing rates down. The timing is just uncertain.
Jay Diamond: What are market expectations for the pace of rate cuts from here, and what is the house view at Guggenheim for rate cuts from here?
Matt Bush: Well, a couple of weeks ago the market was pricing in just one cut this year. Since then, it has moved closer to our baseline view of two cuts this year. You know, I would say around our central expectation of two cuts we do see slightly more risk toward more cuts than fewer cuts. We think they could speed up the pace of cuts if policy changes turn out not to be inflationary as feared, or if we see weakness reemerge in the labor market. And on the flip side, we think it would take a lot for them to begin hiking again. We think market expectations of rate hike pricing are a little bit overdone right now, so we continue to see a downside skew to the pace of Fed cuts.
Jay Diamond: Do you have an opinion on when the next Fed cut, if it comes, would come?
Matt Bush: I think after the January meeting, where Powell really emphasized, you know, they are in no rush. March looks a little bit less likely. So I think May or even June is most likely for the next rate cut.
Jay Diamond: So Evan, you’re watching the markets both in anticipation of the Fed meeting and then after it happens. Tell us what about the market reaction to the FOMC in bonds and stocks… was it the way you expected? Did you see anything interesting?
Evan Serdensky: As you said, very little was anticipated from this meeting, and we really didn’t get many surprises either, both in terms of the statement or the press conference. The December meeting was much more of a tossup: We always knew that either December or January was probably going to be the last cut before a pause phase. So this meeting was much more clear since we got that answer in December. The Fed’s really been reacting to the data, and as Matt mentioned, the labor market, which has shown some signs of weakness under the surface, has really stabilized lately and inflation data has remained elevated. And obviously, government policy risk is highly uncertain at this point. So a pause is sort of natural here. And it’s in line with the Fed’s data dependent framework right now. I think Matt nailed it that the most important part of the press conference was Powell’s comments on where they think neutral is, which is basically lower than here. He emphasized that essentially every committee member believes they’re still in a restrictive stance and above the long-term neutral rate. This was shown in the summary of economic projections and the dot plot that we got in December. There wasn’t an update in this meeting, which still had two cuts priced into this year, even though inflation in their projections won’t return to target by the end of this year. So that is the primary rationale for continuing to cut here and for the market to expect cuts.
Now you asked about bond and stock reactions. They were very muted. The stock market, as you mentioned at the beginning, was, you know, the Fed’s been overshadowed by the concern of AI stock valuations and future spending expectations in that sector. That’s clearly the biggest factor for stocks right now, much less so the Fed. On the other hand, bonds, the front end has been driven by the Fed. But longer-term rates are more a function of which direction the overall economy is headed, which is a big question mark right now. Are we going to reflate or are we going to have above trend growth driven by productivity gains, a strong consumer reshoring spending, or are we going to continue on a normalization path towards the long-term average growth rate, which is probably below where we’ve been running recently. So longer-term yields are really grappling with that and also how to price term premiums, because that matters for the first time in a long time now.
Jay Diamond: Well, let’s get back to that in a minute, Evan. You mentioned the data dependency of the Fed, so Matt, the data dependency really talks about what are your expectations for the data. So I want to get more granular about the baseline outlook for us, starting with real GDP growth and its drivers.
Matt Bush: Sure, so this week we got data showing another solid quarter of economic growth. Your GDP was up 2.3 percent annualized in Q4, and really this growth continues to be driven by strong consumer spending. It was up over 4 percent annualized in real terms last quarter. So we do see consumers continuing to spend driven by solid inflation adjusted income growth and by a pretty powerful wealth effect given all the stock market and home price appreciation we’ve seen in recent years, and we think that could continue going forward. You know, looking ahead, we think consumer spending remains pretty solid this year. And the outlook for business investment looks pretty good too. We’ve seen business sentiment pick up post-election, and the huge amounts of capex going on in the technology sector provide a tailwind for investment spending this year. So overall, for real GDP, we’re forecasting about 2 percent growth this year, a little bit slower than 2024, but still a healthy pace overall.
Jay Diamond: So the key data point obviously for the Fed in its fight against inflation is inflation readings. So what are your expectations here?
Matt Bush: Yeah, we’re sticking with our view of gradual but bumpy disinflation. The recent inflation data has been pretty good. Data just this morning showed the three-month rate of core PCE inflation, the Fed’s preferred metric, is 2.2 percent, so pretty close to target. And even over a six month pace it’s 2.3 percent, so not far away. You know, the year-over-year readings which get more attention are still a bit elevated at 2.8 percent. But when you look at what’s holding up the year-over-year inflation numbers, it’s really concentrated mostly in these lagging or in these nonmarket category things that don’t really reflect current supply dynamics, places like housing, auto insurance, financial services, that we don’t expect will persist. So overall, the fundamentals look good for continued disinflation.
The big unknown obviously, is what happens with tariff policy, so for now we are penciling in a modest inflation boost from tariffs. We think that keeps core PCE inflation around 2.5 percent this year. But we do think the Fed will at least partially look through any tariff-driven boost to inflation, as it’s a one-time price level increase, not a boost at the ongoing rate of inflation. And we think the Fed won’t be overly concerned about tariff driven inflation as long as inflation expectations stay anchored.
Jay Diamond: Obviously an important driver to all this is the labor market, which is stubbornly strong. What’s your expectations for labor?
Matt Bush: So as Chair Powell noted this week, you know, we’ve seen stabilization in the labor market data. The unemployment rate is no longer rising the way it was in mid-2024. We’ve seen job growth steady itself in recent months, and layoffs just remain really low with no move up in jobless claims. So really the labor markets in a sweet spot right now. It’s solid enough where it’s not a big recessionary risk, but it’s no longer overheated in generating inflationary pressure. So it’s in a good spot right now. We expect that will continue with the unemployment rate being roughly steady this year. We do expect the pace of job growth will steadily come down over the course of the year because of slower labor force growth. The huge amount of immigration flows we saw in 2023 and early 2024 have slowed a lot in recent months, and that should slow labor force growth and whit it the pace of job growth, but because it slows both labor supply and labor demand, that should keep the unemployment rate roughly steady.
Jay Diamond: Now Evan, you referenced before about the market’s expectations. What are your expectations for Treasury yields and the shape of the yield curve going forward?
Evan Serdensky: As I mentioned, for the most part, yields are following the data. And our fundamental view, as Matt just articulated, is for kind of sideways growth and slight moderation. And therefore we think yields should trend lower, very slowly though, but the path to get there could be very bumpy too... policy uncertainty again is this this huge caveat. So therefore, you know, we’ve been approaching the market more tactically with a slight bias overweight overall to interest rates given our long-term expectations. But pushing out the yield curve a little bit more, we’re more cautious on the long end because again term premiums are a factor here. Matt’s team has done a lot of really interesting work in the space, and the short answer is that we’re probably back to a long-run average level, but there’s risk of overshooting at this part of the cycle, especially given massive Treasury issuance which builds into the term premium. The intermediate part of the curve, call it 3–7 year, is our preferred area. I think that probably has the best absolute risk reward given still elevated yields there and less downside price risk if rates rise from here compared to longer duration Treasurys. We’ve also been implementing and utilizing TIPS, Treasury Inflation Protected Securities, in order to mute the risk of rising inflation expectations, which could obviously negatively impact nominal Treasury prices from here. Break evens still look pretty attractive to us. They’ve risen a decent amount over the last year since we’ve started implementing them, but the intermediate tenors still look pretty good given the forecast for inflation is sort of stickier.
Jay Diamond: And what do you think about credit performance going forward and your general risk appetite?
Evan Serdensky: Most risk sectors are in a really good place here fundamentally, given the remarkably strong economy in the U.S. especially. Corporates have also generally done the right things in terms of leverage, pushing out maturities over the last few years as well. So there are a couple of pockets of concern, but largely we think risk assets look okay. That said, valuations across spread sectors reflect this at this point already. We saw a lot of dislocation in spreads in 2022, given there was a ton of fear of essentially anything fixed-income related. We leaned into that opportunity mostly through investing in high quality corporates and structured credit. And over the last couple of years we’ve seen that normalization and compression occur. And so now spreads are in lower percentiles at this point. So we have to balance the fundamental picture and valuations, and it leaves us roughly neutral in terms of overall risk appetite. We’ve let our credit positions actively and passively drift a little bit lower over the last year as well.
Jay Diamond: Both of you have referenced the new administration in Washington, so let’s spend a minute or two on that. You know, government policy always has the potential to affect economic outcomes and market performance, but perhaps never more than it does today. How has the policy agenda of the new administration affected your outlook? Matt, why don’t you go first.
Matt Bush: Well, I think it’s no surprise to say that policy uncertainty remains very elevated, and there’s still a large number of question marks out there. I do think the first two weeks of the new administration have shown us to expect volatility over the course over really the next four years, but also the first two weeks have given a little bit of a preview of what policy priorities will look like. Some of the most immediate and forceful actions have been on immigration. You know, as I mentioned, immigration flows have already slowed significantly, and it’s clear immigration is going to slow further from here. On a macro level, fewer workers entering the labor force means slower GDP growth. And so that is a key reason we expect a bit of a cool down in growth this year. I think another signal from the first two weeks was a priority on deregulation. Businesses are already responding positively to these initiatives. We’ve seen a number of business sentiment surveys pick up post-election and more businesses indicating plans to invest more. So that is somewhat of an offset in terms of a positive factor for the growth outlook. Probably the biggest wildcard is tariff policy. It was somewhat encouraging that there weren’t immediate broad based tariffs imposed on day one, and it seems like the strategy of the administration will be to use threats of tariffs to gain concessions from other countries. We’ve already seen that with the Colombia immigration episode, and that appears to be the strategy with Canada and Mexico right now. So we don’t expect all the threats will ultimately be imposed, but we do expect some of them will on select countries and select industries, and our expectation is that the effective tariff rate will roughly double, which, as I mentioned, does boost inflation a bit. And then the final piece of the policy puzzle is fiscal policy. You know, there’s a lot of tax code ideas being floated, and some really big spending cuts have been proposed to pay for them. I think right now our assumption is that the path of least resistance is just to extend the Tax Cuts and Jobs Act without many additional tax cuts and without major spending cuts, so that’ll help avoid a fiscal drag. But it doesn’t really add new fiscal stimulus. So if you add up all these different policy areas together, it leads to our view of growth slowing a bit but holding up pretty well. Inflation [is a] little bit stickier than our pre-election baseline, but as I said, the range of outcomes remains pretty wide. I think the big picture thing that provides some comfort to us is that the administration does seem sensitive to market signals. So any disruptions to the stock market or a sharp rise in Treasury yields could lead them to walk back some of the more extreme proposals. But again, it’s likely to be a volatile environment as that interplay between policy announcement and market reaction plays out.
Jay Diamond: Evan, how are you factoring the new administration and potential policy outcomes into your outlook?
Evan Serdensky: Yeah, I think Matt hit on all the major policy implications from the economic side. When you’re thinking more specifically towards markets, you know, picking up on the fiscal policy aspect and thinking about tax policy, that’s obviously, you know, an area where there’s legitimate concerns around the direction of our fiscal deficits from here. They’re not new, but it’s hard to see them getting much better either. That means more Treasury issuance, and that has already had a real effect on yields back to our term premium discussion. But so far that’s also been met with very strong demand. U.S. yields right now are really exceptional when you look at what’s achievable more globally. Think about German bunds, you know the 10-year point at the mid-2s, Japanese government bonds in the low-1s, Chinese government bonds in the high-1s. So we’re seeing strong buyers from many traditional and nontraditional buyers of Treasurys at these levels. The other major theme, I think, is deregulation, which has a very important and immediate effect on credit markets. When you think about deregulation, a lot of it can be implemented very quickly, pen stroke risk. So it perhaps has a disproportionate effect on credit markets versus equities in today’s market too. You think about sectors like financial services, banks specifically, that’s an example of a sector that will benefit and already is benefiting immediately from deregulation by freeing up capital. So broadly speaking, I think deregulation in aggregate will have a positive effect on credit. So we think spreads will continue to hold in here at tighter levels, but the effects are more nuanced when you think about places like healthcare and technology. It can have a more disproportionate effect at the issuer level.
Jay Diamond: So, Evan, sticking with you for a minute, given the Fed decision and the macropolitical backdrop, if you will, how are you approaching portfolio strategy right now in execution and where are you finding the best value?
Evan Serdensky: Well, policy from the new administration isn’t on a clear path, sort of by design. The element of surprise is important in these international negotiations especially. Neither is the Fed policy. One of Powell’s favorite lines that he uses is that their policy is not on a preset course. So in terms of portfolio strategy it would be sort of silly to having an outlook or a strategy that’s on a definitive path, too. We know that policy creates both challenges and opportunities, so we’re assessing both sides of that in today’s market. So you want to be more nimble here. You want to be attentive to any meaningful shifts in policy. But we’re rooting our long-term positioning in how we see the underlying economic picture playing out.
In terms of opportunities, the best value we think right now is in monetizing still very elevated levels of interest rate volatility, and there’s a few ways to do this. One over the last several years has been in high quality credit, both on the corporate side and on the structured side, which again, it underperformed dramatically in 2022. We’ve been recovering from that for the last two years. It’s still a good place to be strategically, but a lot of the more liquid segments of corporate markets in particular look pretty fairly valued now, although there’s some total return potential from other segments like structured credit. Two is in sectors that are directly affected by high interest rate volatility. Agency MBS is probably the best example for this, and this has probably been our most meaningful shift in our portfolios over the last year. We’ve steadily added throughout the year to mortgage backed securities as the relative value has improved, and that’s been a good decision. We saw meaningful spread outperformance in sectors like corporate and structured throughout the year, while MBS finished the year basically flat on spreads. So it was good to not rush in too early, but now the relative value has improved, especially as carry becomes a much more important factor from here. And lastly, we see value in being slightly more tactical on rates positioning specifically, since interest rates are just moving around so much.
Jay Diamond: Now just as a follow up, Evan, we’ve obviously all noticed that spreads in many sectors have come into somewhat near their historical tights. So how do you put that into context as you’re making these transactions?
Evan Serdensky: Yeah, a few ways. Spread valuations make sense in the context of the broader economic conditions that we’re seeing, as we’ve discussed. However, I think another aspect is the technical picture, which has probably mattered as much as fundamentals. There’s obviously a lot of fear around Treasury supply, which I think has probably distracted a bit from the really solid supply dynamics across other fixed-income sectors. Think about Agency mortgage backed securities, where supply has really fallen off a cliff, given refinancings are rare in today’s rate environment. And you also go around the world of other credit assets, and gross supply numbers are really large but net supply has been really low. CLOs are a good example where you hear these really dramatic, huge production stats, but the market itself is only grown by a couple percent in the last year because most of the supply is just repricings and resets. The high yield market is another example. The market size has basically been stagnant, and then if you incorporate net inflows to the sector and reinvestments from coupon income, it’s probably shrinking again. So there’s a lot of tailwinds on the technical side of things for credit assets. Corporate spreads, in particular the most liquid categories, have performed very well, and so the best times are behind it. And in line with that we’ve reduced exposure a little bit here. But yields are still really attractive, and they provide a large buffer against potential spread volatility. The income that you can earn in high quality fixed income right now, even without taking much duration risk, is still really worthwhile, in our opinion. So for asset allocators, I think it makes a lot of sense to layer a little bit more in, especially relative to the last decade when yields have been so suppressed.
Jay Diamond: So, Matt, as a member of the Macroeconomic Research and Market Strategy group, you and your team look at a lot of things that are going on in the world and in the markets. What are some other factors that you and your team are looking at right now that maybe we haven’t discussed?
Matt Bush: We focus on the generally positive outlook for the U.S. economy, but growth in other major economies has been quite weak, and I think the strongest performance has kind of overshadowed that. Economic growth in Europe was less than 1 percent last year, and growth for 2025 continues to get marked down as the manufacturing sector in particular is really struggling there. In China, they’re struggling as well. They have structural growth issues as they try to find a new growth model and policy support to, you know, help stimulate the economy, has continually disappointed. And so we think this theme of global divergence continues in 2025, where the U.S. is the clear outperformer. And that’s an important tailwind for U.S. markets given yields are above other major economies, as Evan mentioned, and the earnings outlook for U.S. equities is brighter. But we are watching the risk that a weak global backdrop starts to weigh on the U.S. So far, the U.S. has continued to power ahead, but if we see weakness intensifying overseas, potentially driven by more aggressive trade policy, that could eventually be a risk to the U.S. economy.
Jay Diamond: So bonus question as far as exogenous factors go, we saw a significant move in the equity markets recently, which actually drove some demand into Treasurys, and that was related to DeepSeek, a potential Chinese entrant into the AI arena. What did this event tell you about AI or overall risks in general in the market?
Matt Bush: A lot of the commentary has been focused on what DeepSeek and cheaper AI means for the large U.S. based AI companies. But I think taking a step back, sort of as an economist, it’s worth remembering that less expensive AI would actually be a very large positive for the economy overall. If anything, it makes the outlook for higher productivity growth from AI more likely if you can do all these amazing things with AI for a lower cost. And so I think away from the specific company level news, it’s a good thing for the long-term outlook for the U.S., and really the global economy. You know, in the near term it could be a negative for capex spending from the large tech companies who are spending hundreds of billions of dollars to build data centers and train models. But even there it’s not clear the demand for computing power would be reduced if the models are more efficient. It’s not clear at this stage in AI development how much actual end user demand is out there. So I think the market reaction was interesting. Despite the overall market being down led by a sharp selloff in Nvidia, there were actually more stocks positive than negative on the day of the DeepSeek selloff, which I think highlights that point that cheaper AI in general is good for the broader economy, even though it could create some near-term stress for some of the more AI focused U.S. companies.
Jay Diamond: Evan, how did this episode look through a portfolio manager’s eyes?
Evan Serdensky: Yeah, I think the event tells us the achievements in this space and advancements are going to come lightning fast, and it has really potentially far reaching implications that are, frankly, difficult to grasp at this point. So it really means you need to be vigilant to these major shifts, especially now. Generally, disruption is a huge factor across all levels of the economy. So therefore it really helps to be diversified now and make sure that you’re not too exposed to any specific trade thesis at this point. I think, you know more locally and near term, it was really interesting to see how good the equity market was at parsing out the specific risks from DeepSeek. You’ve got Nvidia, $3 trillion stock, was down 20 percent, and the S&P looks like it’s going to finish the week flat maybe even slightly up. So you know perhaps that’s the market cutting itself. And we’ll eventually see that risk trickle down to other sectors. But the immediate discipline is a really good signal to me and tells me there’s still a lot of demand for financial assets broadly.
Jay Diamond: Well, really good insights, fellas. I really appreciate your time on such a busy day. Before I let you go, Matt, what is the main takeaway that you would have our listeners remember after hearing this podcast?
Matt Bush: I think it’s the generally positive outlook for the economy. There’s so much uncertainty out there right now, whether it’s the path of AI or direction of policy in Washington. It’s important to remember the fundamentals look pretty solid right now. You know, overall, both on the household and corporate sector, the U.S. economy looks to be in pretty good shape. Inflation continues to make progress. You know, there could be some bumps in the road from policy changes. But overall it’s a pretty bright outlook for the U.S. in particular, especially relative to the rest of the world.
Jay Diamond: And Evan, any final thoughts for you?
Evan Serdensky: Yeah, I think it’s certainly an exciting time to be investing right now and especially in fixed-income markets where yields are at really interesting levels. It’s worthwhile to be involved. And we have a large range of products that target specific opportunities, different parts of the curve. So I think fixed income is worth a look right now. And I’d also just like to thank our listeners. We really enjoy doing this podcast, putting it out there, and we like the feedback as well. So thank you very much for the listeners.
Jay Diamond: Well, thanks again for your time, and Evan, and we’ll definitely have you visit soon to keep us updated. And thanks to all of you who’ve joined us for our podcast. If you like what you are hearing, please rate us five stars. If you have any questions for Matt, Evan, or any of our other podcast guests, please send them to macromarkets@guggenheiminvestments.com, and we’ll do our best to answer them on a future episode or offline. I’m Jay Diamond. We look forward to gathering again for the next episode of Macro Markets with Guggenheim Investments. In the meantime, for more of our thought leadership, including our 10 Macro Themes for 2025, please visit guggenheiminvestments.com/perspectives. So long.
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