In this episode, Katie Nixon, Chief Investment Officer for Wealth Management at Northern Trust, is joined by Northern Trust Asset Management’s Head of Global Macro for Fixed Income, Antulio Bomfim, to discuss the causes, historical context and future implications of the Fed’s 50-basis-point start to the rate-cutting cycle. Antulio brings more than 30 years of combined experience as a buy-side portfolio manager, researcher, author and senior advisor to the Board of Governors of the U.S. Federal Reserve System.

Katie and Antulio discuss the unusual size of the initial rate cut, which reflects a shift in the balance of risks between expected inflation and labor market conditions. Specifically, the Fed’s intentional use of the term “recalibration” of rate policy signals confidence that inflation is trending toward its target and that further deterioration in labor markets should be preempted.

They go on to define the concept of a neutral interest rate, the factors that influence its level, how the approximate 3% neutral rate fits into the context of history, and what this means for fair value in Treasury markets. Finally, they discuss the factors that influence the term premium in Treasury markets as well as the roles that communications and managing the balance sheet play in the Fed’s monetary policy toolbox.

• (0:49) – What conditions preceded the new cutting cycle?
• (2:50) – What is Antulio’s role and professional background.
• (3:44) – What does the Fed’s unusual 50-basis-point rate cut signal to markets?
• (5:23) – Does the Fed see more labor market weakness than the market is anticipating?
• (8:18) – What does the Fed mean by recalibration, and how does it inform future Fed policy?
• (12:37) – What does “neutral” interest rate policy mean, and what factors influence it?
• (15:19) – How does the current, approximate 3% neutral rate fit into historical context?
• (17:53) – What implications does a higher neutral rate have for Treasury markets?
• (20:03) – What factors influence the term premium?
• (22:47) – Is there a similar concept of neutral for the Fed’s balance sheet?