Oil prices surge to two-week winning streak as Iran supply fears grip markets
This week was all about the Federal Open Market Committee (FOMC) statement on Wednesday, when the Fed cut key interest rates 0.25% for the third time this year. The Fed lowered its inflation forecast for 2026 to an annual pace of 2.4%, down from 2.6% previously forecasted, and then raised its 2026 GDP forecast to an annual pace of 2.3%, up from its previous forecast of 1.8%. Interestingly, the Fed signaled that there would be one more key interest rate cut in 2026, but the Fed Funds futures market is expecting two key interest rate cuts with a new Fed Chairman taking over in May.
The Fed also diverted more of its reserves to buy short-term Treasury securities but refused to this quantitative easing. However, this news caused the Treasury yield curve to steepen, which caused both stock and bond markets to rally. During Chairman Jerome Powell’s press conference, he acknowledged that the housing market remained weak but stressed that the Fed was “well positioned” to see how the U.S. economy responds moving forward. However, Powell also said, “Job creation may be negative” and added that “We think there’s an overstatement in these (i.e., Labor Department) numbers,” which were very dovish comments that helped to further boost stocks and bonds.
There were three dissenting votes on the FOMC, since Stephen Miran wanted a 0.5% key interest rate cut, with two FOMC members, Chicago’s Austan Goolsbee and Kansas City’s Jeffrey Schmid, voting for no key interest rate cut. Interestingly, Schmid also abstained from cutting key interest rates at the October FOMC meeting, so he is the most hawkish FOMC member.
The bottom line is there is no reason for the Fed to remain restrictive when the U.S. economy is not creating many jobs, so in my opinion, the Fed has to cut key interest rates at least two more times in 2026 and move to a “neutral” rate. Furthermore, the inflation risk has fizzled, and due to falling home prices, excess rental properties, and falling crude oil prices, so if anything, there is a potential deflation risk that the Fed must consider.
The Wall Street Journal reported that Kevin Hassett said he would rely on his own judgment and would not bow to political pressure over cutting interest rates. Of course, Hassett has to say that to get confirmed by the Senate as the next Fed Chairman. Hassett added that there is “plenty of room” to cut rates in the months ahead, so he is aligned with President Trump that interest rates need to come down to stimulate housing and other interest rate sensitive sectors of the U.S. economy. When asked whether he would listen to Trump if he took to Truth Social to order Hassett as Fed chair to cut interest rates, Hassett said, “You just do the right thing.” Obviously, Hassett is mastering the doublespeak that all Fed Chairmen must use from time to time.
The Commerce Department announced on Thursday that the U.S. trade deficit plunged 11% in September to $52.8 billion, which was substantially below economists’ consensus estimate of $63.1 billion. The U.S. trade deficit is now at its lowest level in the past five years. U.S. exports surged 3% in September to $289.3 billion, which is the second-highest level on record, while imports rose 0.6% to $342.1 billion. If energy prices move higher, then the U.S. trade deficit is expected to shrink even further due to all the U.S. exports of crude oil, processed fuels, and LNG.
ADP’s latest weekly private payroll data showed that 4,750 jobs per week are being created based on a four-week moving average. This anemic job growth is not strong enough to significantly change the unemployment rate, so unemployment and weak job growth are expected to remain the Fed’s top priority.
The Labor Department on Thursday reported that weekly jobless claims surged 44,000 to 236,000, which was the strongest weekly rise since March 2020. However, the previous week was unusually low and skewed by a seasonal adjustment, which is why the four-week moving average is much more reliable. The four-week moving average of weekly jobless claims rose slightly to 216,750 in the latest week. The best news was that continuing claims for unemployment declined by 99,000 to 1.838 million.