The current 2 year treasury note is pricing only 1 more cut. The 2 year is at 4.331% and Fed funds is at 4.58%. That's about a 25 bps differential. Now of course, the 2 year could top out and revert back to where it was in September in which case we would have at least another 100 bps of cuts. It's worth noting that core CPI (3.3%) is still too high for me to declare victory. I would argue that we may
not be in restrictive territory anymore given that Fed funds is only 1.28% above core with labour productivity that is above that. The interest payment on the debt will only add to more inflation. If the Fed drops rates anytime soon, they would be making a serious policy error. This is not my opinion but the opinion of the bond market. Don't forget that the Fed is still running QT which is actually shrinking the money supply. What do you think will happen to inflation when the Fed can begin to buy mortgage backed securities?
Trump is not permitted to fire J Powell. He cannot forcefully decide to put someone else in place and lower rates with no justification. J Powell is in power until May 2026 and will likely get replaced by Christopher Waller, a Republican. The Fed is supposed to remain apolitical and can only make decisions based in part on the fiscal policies of the Trump administration. If Trump can successfully cut wasteful spending and trim the deficit then that would lead to lower rates on the long end of the curve and more cuts by J Powell. If the economy contracts or slows down and unemployment continues to rise, then that would cause the Fed to lower rates even further. This could be the catalyst that breaks the economy but for all the right reasons.
I’ll leave with one last remark. Politicians will pick inflation over a recession any day of the week.