By Gayl Mileszko
Market Commentary
Palace Intrigue
The financial markets assigned an 87% probability of a 25-basis point cut in the Federal Reserve’s target range for the fed funds rate on Wednesday, so no one was surprised by the actual decision. Most attention was focused on the dot plot and how widely individual projections differed. Fed watchers know that the Fed’s organizational chart — as well as its headquarters building — are under construction. Interviews for a new chair have been held and the President reports that he has a nominee, the name to be released at a later date. An announcement might come today, next week or next month, but global markets most definitely do not want to see a shadow chairman, someone nipping at the heels and undermining the position and authority of Jay Powell, whose chairmanship officially ends May 15, 2026, although he still has another two years as a Fed Governor. Treasury Secretary Bessent has reportedly done a great job in handling the vetting process and keeping his boss from name-dropping in the middle of the night on Truth Social. Nevertheless, speculation on the next central bank chair dominates holiday cocktail talk in Washington and New York.
With Grace and Hammers
Over the course of history, FOMC votes have almost always been unanimous. For those who follow Congress, federal agency, and White House policymaking, this is most unusual. Perhaps it is a testament to the power of the chairmanship if not the high esteem held for the 17 who have been appointed, the ones who have with grace, incentives, or hammers orchestrated complete agreements in order to present a united front to global markets. There have certainly been some all-powerful Oz-type figures in that role and there have been brutal, sometimes physical, battles with presidents who have accused them of placing themselves above the presidency and the millions who voted for his agenda. Given the range of economic conditions, including depression, recessions, stagflation, bubbles, pandemic, bank failures, unprecedented fiscal stimulus and more faced by all the Fed officials appointed by different presidents, confirmed by different Senates, coming from different regions and backgrounds, it is astonishing that there has not been more dissent displayed publicly in the past. Perhaps traders will have to learn how to manage a new paradigm wherein Fed decisions are made by very narrow margins, just as with Supreme Court and U.S. House votes.
The Ayes, Nays, and Turnover
The St. Louis Fed reports that, since 1957, only about 6% of all Federal Open Market Committee votes have seen dissents. As is evidenced by Wednesday’s 9-3 vote, that is destined to change, at least during the next few years. The 12-member FOMC voting on monetary policy consists of the seven-member Board of Governors, the president of the New York Fed and four other reserve bank presidents who serve one-year terms on a rotating basis. Governors now include 3 appointed by President Biden and 3 by President Trump plus Jay Powell who was first appointed by President Obama and elevated to the chair by President Trump. The next FOMC rate decision will come on January 28, 2026, just days before the expiration of Governor Stephen Miran’s term on January 31. Miran may resign at any time before then or continue to serve until a successor is named. The future of that seat is a headline event, whereas not much attention is being paid to the fact that the terms of all 12 federal reserve bank presidents expire on February 28, 2026, about two weeks before the second FOMC meeting of the year on March 18. Reserve bank presidents are selected in a process managed by the local bank’s Class B and C directors and have, in the past, been unanimously approved by the Board of Governors to serve five-year terms. The unanimous part may change next year, depending on the leanings of the next class of appointees.
Arcane Rules of the Road
The central bank is a hybrid public-private entity, designed to be insulated from short term political pressures, self-funded, yet still accountable to Congress. For most of its history, the Fed has operated far from the 24/7 news cycle. Its processes are still quite arcane in this era of tweets and Instagram. Meetings are not broadcast live or recorded. Until the mid-1990s, meeting minutes were actually held confidential for five years. Even now, minutes provide general summaries, not verbatim transcripts. The first post-meeting press conference was not held until April 2011, and regular Q&A with the media did not begin until January 2019. But during the pandemic, hardly a day went by without mention of another first-time Fed intervention to try and stabilize the financial markets – including the launch of a municipal liquidity facility. Next month, there will be more spotlight on the central bank, its chairman and members, as the black-robed members of the Supreme Court take up Trump v. Cook, the case to resolve the issue of whether a president can remove a Fed Governor “for cause”. The intriguing oral arguments are scheduled for January 21, 2026.
What Comes Next?
With less than three weeks to go until 2025 comes to a close, thoughts turn to what comes next. We shake our snow globes and hope to find a clear landscape once the snow settles. Alas, there are so many things swirling around, very little is clear. As always, we are optimistic, hopeful, big believers in our economy, our business, our people, our future. But the world is a messy place. The U.S. Coast Guard just seized an oil tanker off the coast of Venezuela. Tensions grow between China and Japan over Taiwan. Russia is showing little interest in a peace deal despite suffering over a million casualties. North Korea continues to launch rockets and cyberattacks. 68 million tons of rubble cover Gaza. In addition to all the palace intrigue reported by the British gossip rags, there is plenty more in Jordan, the UAE, Thailand, Cambodia and Malaysia. Here at home, the White House is always full of surprises. Very thorny issues vex the debate over the defense authorization bill and Affordable Care Act subsidies. Our temporary federal funding measure expires on January 30 and another government shutdown looms. There could be more delays in economic releases making the data-dependent Fed hover in a holding pattern for longer. The latest dot plot reflects the division within the FOMC on the appropriate target rate through 2028 and beyond.
Buzz on Affordability
Whether or not the Fed cuts rates zero, one, two, or three times has almost no impact on the lives of most on Main Street. Grocery prices, credit cards, and mortgage rates remain high. (Don’t these Fed officials ever go shopping?) Affordability is the voter’s concern and the buzzword on every politician’s lips. Nevertheless, we are spending like drunken sailors during this holiday shopping season. The bills will soon come due and reveal that we are becoming increasingly reliant on buy-now-pay-late schemes and falling behind on our auto, housing, and student loan payments. All the economists tell us that things are good, our economy is growing, corporate earnings are solid, unemployment is low, there are 7.67 million jobs waiting to be filled. But Jay Powell just warned that jobs numbers may be drastically overstated. Tens of millions are in fact worried about their jobs, their finances, and their escalating health care and utility bills. Consumer sentiment is 28% below where it stood just one year ago. We are not sure where we stand with our longtime allies and what new trouble may brew overseas. The artificial intelligence boom feels overdone. Tariff issues impact our expectations for sticky inflation, and yet we are fearful that if the Supreme Court rules against the president’s authority to impose all these tariffs, we will see major volatility and selloffs in the financial markets.
The Song Does Not Remain The Same
Oddly, the bond markets have not been singing from the same song sheet as the Fed. Our central bank has cut interest rates by 175 basis points since September 18, 2024, but both the 10-year and 30-year Treasury benchmark yields have risen. The 10-year yield has increased from 3.70% to a high of 4.79% on January 14 and currently stands at 4.13%. The 30-year has risen from 4.02% to a high of 5.09% on May 21 and now sits at 4.77%. This anomaly aside, interest rates have been favorable for many borrowers this year, and the current average rate forecast by economists surveyed by Bloomberg shows the 10-year Treasury yield to remain in the range of 4.06% through the end of 2026. Investment grade companies have successfully brought $1.58 trillion bonds to market so far this year. High yield corporate issuers have sold $321.4 billion, and predictions for next year run as high as $410 billion. Municipal bond issuance will likely exceed $560 billion this year, and many analysts forecast $600 billion to $750 billion next year as pandemic-era stimulus dries up and Trump Administration policies call for federal grants and aid to shrink along with support for many activities that have long counted on federal dollars. Capital needs to remain great but, for at least the next three years, it looks like many fiscal responsibilities will shift to states, localities, and nonprofits. This includes addressing what the Fed chair terms a “structural housing shortage,” something long familiar to the senior housing community.
QE Sneaks Back In
This week, markets anxiously awaited confirmation that the expected rate cut in fact was made and that at least two more reductions are on the horizon. After Wednesday’s press conference, which the Financial Times dubbed “fractious”, futures trading still reflects probabilities of cuts in April and September. The Fed has reduced its balance sheet by $2.4 trillion since June of 2022 and quantitative tightening ended as of December 1. Now, for the first time since October of 2019, Jay Powell has announced that the Fed is about to resume purchasing $40 billion of Treasuries, specifically T-bills, a month, to stabilize money markets. Mom and Pop investors have expressed fears about the direction of markets, sending the third biggest weekly amount of cash this year — $86 billion — into money market funds last week. Assets deposited into money market funds have increased in 16 or the last 17 months as investor sentiment has swung between Extreme Fear, Fear, and Greed. The M2 money supply at $22.3 trillion is at a record high.
Senior Living and Charter School Financings This Year: HJ Sims Brings $2.17 Billion
The muni calendar this year has been robust with weekly issuance exceeding $10 billion on average. Last month saw 11 charter school financings for a combined par of $258 million, including three transactions by HJ Sims. We are proud to lead the league in the charter and private school financing sector, having brought $955 million to market year-to-date. Since the start of December, we have seen several others come to market: Heritage Academy, Pine Springs Academy, Renaissance Charter, Midlands STEM Charter, and Classical Academy of Sarasota. In November, 11 senior living deals came to market with a combined par of $1.33 billion. During the last 11 months, there have been 80 financings in this sector for total par issuance of $6.8 billion. HJ Sims ranks as one of the top two underwriters of senior living and care bonds this year with transactions totaling $1.22 billion.
Last Call
We are seeing higher than average municipal trading volume heading into year end. At this writing, the 1-year AAA general obligation municipal bond yield is 2.48%; the 10-year stands at 2.77% and the 30-year at 4.22%. Given the holiday schedule, not many full trading days remain, and liquidity thins alongside industry staffing of trading desks, so please reach out soon to your HJ Sims representative for guidance on tax-loss harvesting and positioning your portfolio for 2026.