Markets Hold Steady as Fed Stays Course and Economic Signals Remain Balanced

Matthew Rubin Chief Investment Officer

 

1. The Federal Reserve held rates unchanged last week, while signaling a gradual path toward modest rate cuts as inflation trends improve.
2. Jobless claims declined, pointing to a labor market that remains stable even as hiring slows and job searches lengthen.
3. Treasury yields edged lower, though rising inflation expectations continue to shape a higher-rate environment and a slower outlook for rate cuts.

 

1. Fed Holds Steady as Inflation Path Remains in Focus

Last week, the Federal Open Market Committee left the federal funds rate unchanged at 3.5%–3.75%, in line with expectations.¹ Updated projections continued to point toward one rate cut later this year and another in 2027. Policymakers raised their inflation outlook for the next two years, reflecting the temporary effects of higher oil prices and residual tariff pressures, while also noting stronger productivity trends.

Current policy appears close to neutral, with the fed funds rate near 3.65% and the Fed’s preferred inflation measure at 2.8%.¹ Treasury yields moved higher following the announcement, with the 10-year yield reaching 4.27%.¹

Looking ahead, the Fed still appears positioned to ease policy gradually, with rates likely moving toward the 3.25%–3.5% range by year-end.¹ A labor market marked by slower hiring but limited layoffs may allow policymakers additional time to confirm that inflation is steadily moving toward the 2% target.¹ Over time, lower rates should help ease borrowing costs and support both consumer activity and business performance.

2. Jobless Claims Signal Stable but Slower Labor Market

Initial jobless claims fell to 205,000 last week, coming in below expectations and suggesting layoffs remain limited.² At the same time, continuing claims edged up to 1.86 million, indicating that some workers are taking longer to secure new roles.² Together, these trends point to a labor market that is cooling gradually rather than weakening sharply.

The current balance between slowing job growth and a moderate pace of layoffs should support wage growth that continues to outpace inflation in the near term. However, higher oil prices may push inflation upward in the months ahead, which could limit gains in real wages.

3. Bond Yields Ease Slightly as Inflation Expectations Rise

Bond yields declined modestly last week, with the 10-year U.S. Treasury yield settling near 4.4%.¹ Despite the dip, yields have trended higher in recent weeks, mainly driven by rising inflation expectations. Market-based measures, including Treasury Inflation-Protected Securities, show 10-year inflation expectations increased by roughly 15 basis points this month to 2.4%.¹

Markets appear to be adjusting to the possibility that inflation may remain elevated in the near term, partly due to higher oil prices. As a result, markets now expect rate cuts to begin later and unfold more gradually than recent Federal Reserve projections indicated.³

Even so, the broader outlook still points toward eventual policy easing. A stable labor market should give policymakers time to assess whether inflation, currently 2.8% as measured by personal consumption expenditures, will continue to gradually approach the 2% target before implementing additional rate cuts.¹

For the period ending 3/20/26.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ U.S. Federal Reserve
² FactSet
³ CME FedWatch

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