Trading Desk Talk

Blowin’ Smoke

In “Blowin’ Smoke,” country legend Kacey Musgraves sings about what people tell themselves to make it through tough times. Today, America is at war (albeit with a ceasefire). The feud between President Trump and Fed Chair Jerome Powell appears to be escalating. Oil is trading well off its previous $60 level. And the IMF and World Bank cut their forecast for global growth. These developments have weighed on sentiment. But, as Musgraves might have put it, markets may just be telling themselves what they need to get by.

Powell’s term is set to expire on May 15, and his replacement, Kevin Warsh, has yet to be confirmed by Congress. While the confirmation hearing is set for tomorrow (April 21), Senator Thom Tillis pledged to block Warsh’s nomination until the Justice Department’s probe into the renovation of the Federal Reserve’s headquarters is over, which, ironically like a renovation, has a questionable timeline for completion. This stalemate sets the stage for Powell to remain as interim Fed chair for the foreseeable future.

Though Powell’s term as chair expires on May 15, he can stay as a Fed governor until 2028. Normally, chairs leave the Fed once their time at the helm ends, but Powell said he has “no intention” of vacating his governor seat until the DOJ probe is over. Powell also said recently, about oil prices, that he’s looking through the noise and expects the turbulence to be transitory. If Powell ends up staying longer at the helm, then we should expect no change to the Fed’s fundamental outlook. As noted in past Talking Points, the Federal Open Market Committee is also the prevailing verdict maker, with rates decided by consensus, not by an individual.

Below, we share some recent quotes from Fed policymakers that offer a sense of their current thinking.

• Beige Book Summary: “The conflict in the Middle East was cited as a major source of uncertainty that complicated decision-making around hiring, pricing and capital investment, with many firms adopting a wait-and-see posture.”
• Alberto Musalem, president of the St. Louis Fed (and an alternate FOMC voter), said that monetary policy “is in a good place, and I think it’s probably going to be appropriate to maintain policy at this level for some time.”
• Beth Hammack, president of the Cleveland Fed: “My baseline is that we’re going to remain on hold for a good while, but I do think that there’s two-sided risk to rates. I think there’s risk that we might need to be more accommodative, or more restrictive, depending on how the data comes out.”
• Stephen Miran, Fed governor, said that the energy shock triggered by the Iran war has yet to impact longer-run inflation expectations, and he expects price pressures to return to the central bank’s target in a year’s time. Nevertheless, as perhaps the most outspoken voice at the Fed in favor of a rate cut, Miran’s acknowledgment that inflationary pressures are elevated is instructive.
• Mary Daly, president of the San Francisco Fed: “The question is, what’s going to happen with the war, how long will prices of oil and gas stay elevated, and what will be the … the knock on effects … of other goods and services? It’s really too early to make any statements about that because we don’t know how long the conflict will last.”

To Daly’s concern, some Arab and European leaders believe that a U.S.–Iran peace deal will take about six months to materialize and that the warring sides should extend their ceasefire to cover that timeframe. Trump, however, struck a more optimistic tone last week. “It’s looking very good that we’re going to make a deal with Iran, and it’s going to be a good deal,” he told reporters.

The IMF and World Bank, meanwhile, met last week for their annual spring meeting. Here are some notable takeaways.

• Their global economic growth forecast for 2026 is now 3.1% (down from a January projection of 3.3%), due to the economic shock from the Iran war. But if there are more persistent increases in energy prices, global growth is forecasted to drop further—to 2.5%.
• The IMF and World Bank restored relations with Venezuela, recognizing the interim government and reopening doors to financial support after relations with the country were frozen in 2019.

Pessimistic growth forecasts are understandable now, given the geopolitical landscape and pre-war economic trends. But IMF/World Bank spring meetings still often overstate risks to growth: In three of the last four years, for example, their forecast underestimated actual growth, sometimes by a wide margin. Consider:

April 2025 spring meeting

The forecast for global growth was cut to 2.8% for 2025 (down 0.5 percentage points from the January 2025 forecast), due to the Trump tariffs and trade war concerns; at the meeting the forecast for U.S. growth was also slashed to 1.8% for 2025 (down 0.9 percentage points from the earlier forecast). As Figure 1 shows, both forecasts were well off target.

April 2024 spring meeting

The forecast for global growth was raised to 3.2% for 2024 (up 0.1 percentage points from the January 2024

forecast), thanks to expectations of a softer landing scenario; U.S. growth was also upgraded sharply to 2.7% (up 0.6 percentage points from the earlier forecast), on the back of greater economic resilience. Both forecasts nonetheless undershot actual growth rates.

April 2023 spring meeting

The forecast for global growth was trimmed to 2.8% for 2023 (down 0.1 percentage points from the January 2023 forecast), due to warnings of the weakest five-year outlook since 1990; the forecast for U.S. growth was 1.6%. Both forecasts again underestimated actual growth rates.

April 2022 spring meeting

The forecast for global growth was cut to 3.6% for 2022 (down 0.5 percentage points from the January 2022 forecast), due to Russia’s invasion of Ukraine; the forecast for U.S. growth was 3.7%. This forecast missed to the upside, by a wide margin.

Concerning the war, the recent on-again-off-again talks seem to point towards risks of escalation, but so far, the recent actions of officials are trending towards de-escalation, despite the social media posts and saber rattling. Between the heated rhetoric overseas and threats to and from the Federal Reserve, it stands to reason that volatility could remain elevated. Yet in the end, we hope there just may be a lot of blowin’ smoke.

FROM THE DESK

Agency CMBS — Agency origination volumes picked up last week, although the benchmark was low from the two weeks prior. The market digested $2.2 billion between Fannie Mae DUS and Freddie Mac participation certificates. Fannie DUS volumes were ~$1.3 billion and spreads were flat to one basis point (bp) tighter, week over week. Ginnie Mae volume remained subdued. Spreads on perms were generally flat, while construction loan spreads widened a bit.

Municipals — AAA tax-exempt yields were mixed last week as one- to two-year bonds were two to three bps wider and three- to 30-year bonds were two to four bps tighter, week over week. Tax-exempt issuance totaled $12.6 billion last week. The current calendar shows $11.8 billion for this week. The year-to-date weekly average is $9.0 billion.

The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.