There were two takeaways from yesterday’s Fed announcement. First, the Fed is much closer to cutting interest rates than it expected in September. This explains the sharp sell-off in bonds and stocks. The second finding is simply a confirmation of our recent change of heart regarding inflation data. Powell noticeably downplayed the need to address the labor market and renewed the focus on inflation. The Fed’s change to its inflation outlook for 2025 confirmed the concerns.

In short, the finding continues to be that interest rates cannot fall significantly without a significant decline in inflation. In summary, we have one insight that drives returns higher and another that keeps them from falling.

Today’s chart focuses on yesterday’s market action amid increasing news coverage of the government funding bill. If you were wondering whether this played a role in yesterday’s weakness, consider that the spending bill news came before the Fed’s announcement (the first white line in the chart below). There was no discernible increase in volume or movement in the bond market. Is it possible that markets were fixated on the Fed and fiscal considerations contributed to weakness during the day? Technically, however, this raises another problem: a government shutdown has historically been good for interest rates.