Bond Market Bat Signal: The Campaign to Cut Rates has Begun
Welcome to the Skeptical Investor post right here on BP! A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.
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Today, we’re talkin’ all the wild market activity, I update my interest rate prediction, the President kicks off a Shadow Fed Chair Campaign to Cut interest rates, and I reveal the two exclusive risks to the economy.
Ok, there are three. Do you know what they are?
Let’s get into it.
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Today’s Interest Rate: 6.88%
(👇.05% from this time last week, 30-yr mortgage)----
The Weekly 3 in News:
- - Unemployment of those with a 2-year associate degree is FAR lower than those with 4-year college degrees. Unemployment 20-29 (4 year college grad): 15.3%. Unemployment 20-29 (2-year associate degree), just 2.1%. Learning a trade is powerful, especially in the era of AI (BLS).
- - Homeowner tenure has doubled. In 2005, the median U.S. homeowner lived in their home for 6.5 years In 2024, it’s 11.8 years (ResiClub).
- - AI is scaling faster than the Internet. A lot faster. It took OpenAI 8 fewer years to hit 400 billion searches than Google (Altimeter).
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Inflation Down Again, Despite Tariffs.
So, are interest rates set to drop?Another week and another positive inflation print. Consumer prices rose less than expected, CPI increased .1% for the month, putting the annual inflation rate at 2.4%. And vehicle and apparel prices, which had been expected to show tariff-related increases, actually posted declines. This year, tariffs have brought in close to $80 billion, with little inflation effect.
So far.
The shelter / rent inflation rate has started to flatten out, now hovering around 3.9% annual growth. Shelter inflation “was [still] the primary factor in the all items monthly [inflation] increase (BLS).” Shelter costs are still growing faster than overall inflation, but again, moderating.
Healthy.
So with CPI (2.4%) and PCE (2.1%) inflation now nearing the Fed’s 2% inflation target, is it finally time to resume interest rate cuts? Why have we paused rate cuts since last Fall, when inflation was much higher?
Heck, how the hell did all this happen anyway?
Interest Rates: How got here.
Between 2022 and 2023 the Federal Reserve, in reaction to being late on the subject, finally unleashed the hounds on inflation, spiking interest rates (Federal Funds Rate) from 0.25% up to 5.5%, in a historic tightening cycle. It wasn’t until Fall 2024, amidst a tricky economic landscape of stubborn inflation and the threat of a potentially weakening economy, did the Fed shift gears. Starting in September, it cut rates three times: a .50% reduction to 4.75%-5.00%, followed by two 25-basis-point cuts in November and December, landing at 4.25%-4.50% by year-end. These moves aimed to boost growth as inflation eased and the labor market softened. But since then, crickets.
Surprisingly, long-term Treasury bond yields didn’t drop concurrently, as expected. They stayed high and then climbed after the rate cuts began. Again, we real estate investors care deeply about the bond market, as mortgage rates closely track the 10-year treasury bond.
So What Happened to Bond Rates?
Normally, Fed rate cuts signal to markets looser monetary policy, stronger growth, and tame inflation, pushing long-term yields down alongside short-term rates. This lockstep movement has long been a pillar of monetary policy, allowing central banks to help guide the economy. But in 2024, starting in September, short- and long-term rates parted ways.
Several structural shifts drove this split. A flood of Treasury bond issuance sparked investor worries about U.S. fiscal health, with big deficits persisting despite full employment. Meanwhile, demand for U.S. debt shrank as the Fed trimmed its balance sheet via quantitative tightening, and major buyers like China and Japan pulled back. More bonds, fewer takers—interest rates rose.
How it’s Going.
Roughly 17 years ago, the Federal Reserve became an active participant like never before in shaping the US economy. Born in the shadow of the Great Financial Crisis, the Fed’s near-zero % interest rates and massive quantitative easingpolicies flooded markets with cash, propping up asset prices, curbing borrowing costs, and giving itself extraordinary influence over economic conditions. Holding vast amounts of U.S. Treasury debt, the Fed could jolt bond, mortgage rates, and stocks markets with a single move. The more liquidity it injected into the system, aka printing money, the more leverage it had.
The Fed’s balance sheet is still six+ times what it was pre-2008. But, that clout has faded slightly, as the Fed slowly unwinds its holdings. Although, not it’s not moving too fast; in fact, this year it eased the pace at which it performs quantitative tightening, cutting Treasury runoff significantly from $25 billion to $5 billion monthly. But the does Fed plan on ridding its balance sheet of the extra Treasury notes and mortgage-backed securities it acquired during the COVID era. Once they are finished, that shift will finally, hopefully close a chapter that began in 2008 with bold expansion, followed by a sharp retreat, leaving the Fed less dominant in today’s markets. Of course, they can (and likely will) always return should the economy need another hit of the good stuff.
The bond market is about to kick off this shift.
The Campaign to Cut Begins
The President and most lawmakers on Capitol Hill in both parties want the Fed to cut rates. For his part, the President has threatened a number of times to fire or remove Jerome Powell as Chair of the Federal Reserve. But he has since walked those comments back, saying he has no plans to do so (*cough*, thank you Treasury Secretary Scott Bessent for your sage advice).
But could the President influence or even control monetary policy, without replacing Powell?
Oh yes, and that time is now.
Imagine the President, eager to get interest rates down and replace Federal Reserve Chair Jerome Powell as his term nears its end next May, selects someone now, a year before Chair Powell’s term ends. This person, with encouragement from Administration officials, takes to the media with a clear and calculated message: on day 1, they intend to cut the Fed funds rate and lower mortgage rates. A forceful campaign would signal that a shift in monetary policy will take place in just 10.5 months time, moving bond markets, without the need for the Fed to act.
And the President just overtly telegraphed his intent to do this.
Speaking at the White House last week - Thursday June 12th - the President said, “He [Powerll] was in my office a couple of days ago, and I said, ‘If you think there's inflation, let's find out because I think we're going to keep it down.’”
He continued…
“We'd like to get this guy to lower interest rates…but let's say there was inflation in a year from now, raise your rates. I don't mind… I'm all for it … you don't have to keep them up [there] if [inflation goes] up, I'm okay with you raising [again if needed]…In a year we will guy get out of office, and somebody will come in and cut it a couple of points,and we'll save ourselves seven, eight, maybe even $900 billion dollars a year [if we cut rates].” “What is he doing? Why doesn't he lower these rates?”
The President outright says he will soon be out, he will install “someone” who will cut rates “a couple of points,” and knowing this, the Treasury is going to issue short-term paper today, and then in 1 year when the new Fed Chair cuts rates, Treasury will pivot to longer-term Treasuries.
In other words, it is SO ON. The Campaign to Cut has begun.
Add to this, other Administration officials are being activated to join the Campaign. Here is Director of Federal Housing FHFA Bill Pulte speaking on Bloomberg:
“[You have a Fed that is cutting rates at higher inflation [in September], and then inflation does down and they don’t cut. It’s very hard for the housing market to properly function…Even with a bit of a downward move in interest rates, I think you’d start to see the [upward] trend in housing activity.”
And here is the Vice President going a step further, calling a refusal to cut rates “monetary malpractice.”
This Campaign to Cut will be the bat signal that the bond market needs to start lowering yields, and thus, mortgage rates.
Bold Prediction: I think my year’s end we are in the low 6s% for mortgage rates, and might even touch 5.xx% rates.
If the Fed does not act, the bond market will do its job for them. And at some point, it would appear overtly political if Powerll doesn’t cut rates, rather than the reverse.
My Skeptical Take:
Investor outlook is positive, near an all-time high in fact. Using the stock market as our guide, despite all that is going on in the world, investors are deploying their capital in a risk-on fashion.
This, despite consumer sentiment surveys remaining relatively pessimistic.
Ignore them. They are merely ambient noise.
There are only two real economic risks:
- -Deficits continuing to rise rapidly, suffocating our economy in debt and sinking the US into depression, with the Dollar losing its status as the world currency. Shit that sounds bad, it’s highly unlikely but we have to be aware, and remain skeptical when times are good) And,
- -An actual global trade war, especially with Europe and China. Remember, despite all the media rhetoric, to date, nothing meaningful on this front has yet happened.
If either one of these two things happens, we get a deep recession.
If not, we’re perfectly fine and the economy keeps chuggin’ along.
And the President/Treasury getting involved is a good sign we may avoid both, Congress just needs to play ball and curtail spending, even if slowly over time. A mere 3% spending haircut per year would do it. The next 12 months will be pivotal on that front.
Ah shit, on second thought, there’s a third…An actual war. With the US directly involved.
If we go to war, that could totally fuck everything up. If the Israel-Iran conflict spills over and results in a closure of the Strait of Hormuz, through which 20% of global oil flows, oil could double, to $120-$130 a barel (JP Morgan). Then, recession.
Counterpoint: Of course, if Iran does try to do that, that would pull the US and likely even Europe into the conflict, and it would be the end of Iran. The risk to the US is if other nations decide to back Iran (cough…Russia/China), which I would not expect them to, especially if Iran goes after the global oil trade. Nobody would like that, especially China and Russia. Russia is basically a gas station masquerading as a country. So for Iran, it’s existential, making the risk of them doing this low likelihood, but with ultra-high consequences.
To be clear, I think we avoid getting lulled into the conflict. The President is fairly conflict-averse when it comes to large-scale military action, despite his general public posture, demeanor, tone and tenor.
But I do see far too many politicos eager to upend the Iranian regime, which by all accounts is a horrid dictatorship, but….it’s just… well, our track record in regime change in this area of the world is not the best. And we already supported the overthrow of the Iranian government once before, in 1979. That’s how we got the current dictator - Ayatollah Khomeini.
How did that turn out?
Anyhoo. In my poor attempt to stick to investing, markets and real estate - not politics - all I’ll say is: Government leaders, please just be careful. Find an off-ramp solution as soon as possible.
So, other than a trade war, a debt spiral, or an actual war/black swan event, in my opinion, our future economic outlook is fairly binary. We stay on the path of success, or deep recession, if these high-consequence events happen.
What am I doing? Well, I focus on what I can control. My investments.
For investors like us, this is a time to act strategically and, as Patrick Bet-David said well in his book, plan out “Your Next 5 Moves” in your business. I choose real estate.
So for us, that could include:
- Leveraging data to identify high-potential markets: read those next 5 books on your list (here are a few books), listen to actual investors talk real estate on a few podcasts, and of course, keep reading these posts :). Let the data guide you toward profitable investments in a shifting landscape.
- Get your financing squared away: Call a lender (happy to recommend a few) and talk about options. Do you have the down payment cash ready, or is it stuck in bitcoin or stocks searching for upside? Get it liquid.
- Determine who you are. As Bet-David also said in his book: “[Knowing yourself is rarely talked about in business circles, but it's impossible to think ahead without self-awareness. Once you definitively decide who you want to be, which direction to take will become much more clear, as well as why it matters.]” You can’t do anything until you know who you are and who you want to become. My dad always used to say, “awareness, always have awareness of yourself and your surroundings. Keep it close in mind.” Formulate a clear vision and laser cut it in your noggin.
- Pick your strategy. Are you flipping, buy-and-hold investing or trying to unlock the code to scaling your real estate portfolio? Cut out the side-quests and hone in on your north star. Me? I’m looking for value-add opportunities to buy, improve, raise rents, and hold in multifamily real estate. I’m not hoping and waiting for my investments to appreciate; I’m forcing appreciation with a large value-add renovation. I can control that.
- Stay adaptable. You never know what the market will do. Keep your head on a swivel and be open to changing your mind in the face of new information. As famed VC Mark Andreesen famously says, “strong opinions, loosely held.”
Get your house in order, so you can explode and take advantage of what the market gives you. 2025-2026 is chock-full of opportunity, amidst the pessimism.
Remember, every day brings a new opportunity.
Until next time. Stay Curious. Stay Skeptical.
Herzliche Grüße,
-The Skeptical Investor
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