July 2025 Fed & Rates Call Update

Moving our Fed call to September, with 3 cuts in 2025, but we still expect a total of 100 bps in this rate cycle

• Latest Macro Musing: The NFP report beat expectations for the second month in a row. For the casual observer, the labor market appears to be defying expectations on the surface. However, as we have stressed time and time again, the underlying labor market vulnerabilities have been building for months, and they may in fact be worsening. The share of job losers that are permanent has risen to the highest level since 2015 and the unemployment rate for younger workers continues to worsen. Over 80% of June’s job gains were from non-cyclical industries (government, education, and healthcare), and the remaining 20% were a function of idiosyncratic drivers in construction and leisure and hospitality. We think that private sector hiring has stalled, and we may see sporadic layoffs in some industries in the coming months. Despite the unemployment rate having fallen to 4.1%, the flow of potential workers that remained out of the labor force rose sharply in June (and over 750k have dropped out of the labor force over the past two months), further highlighting the weak hiring environment. We continue to view labor demand as being fundamentally weak relative to the past several years, though changes to supply (both from immigration and participation) are influencing aggregate ratios.
• Fed Rate Path Implications: Our former July cut view hinged upon the results of the NFP report, where we acknowledged that unless the labor data was unequivocally weak, the chances for a July cut would fade. Well as we flag above, although this report was an optically better outcome, but given the unemployment rate ticked down to 4.1% in June, this likely keeps the Fed in a “wait and see mode” until September to cut. As a result of removing our July cut view, we now expect only 3 cuts in 2025, in September, October and December (1 additional cut versus what is currently priced-in).
• US Rates Forecasts: Since we still believe that the neutral rate is closer to 3.375%, we technically just shifted one cut from 2025 into 2026. Therefore, we still view the Fed Funds target range as 100bp too high. Given that we basically shifted our Fed call by one meeting, we roughly did the same for our rates forecasts out the curve. We expect the 10-yr rates to continue to trade in our target range of 4-4.5% for the balance of the year. Given the US fiscal concerns, we do not see 10s trading under 4%, even with the Fed eventually still cutting a total of 100bps. At the same time, there will be less of an urgency to term out the debt, so we don’t see 10yr rates rising meaningful above 4.5%, for now.