The FOMC announced that it will slow its pace of quantitative tightening (QT) beginning June 1, lowering the cap on the amount of Treasury securities rolling off the balance sheet by more than half to $25 billion each month from $60 billion. The slower pace of QT will offer some pressure relief to the Treasury Department, as they won’t have to raise much more from private-sector investors. The reduction in the roll-off of the Fed’s balance sheet appears dovish on the surface, but they are tapering with the intent to allow runoff to continue to shrink the size of the balance sheet back to pre-pandemic levels, which is more hawkish.

On Wednesday Powell outlined two scenarios for future rate cuts: one in which the labor market showed material and unexpected weakness and another in which inflation resumed the decline seen last year. “Those are paths in which you could see us cutting rates,” Powell said. One of these scenarios began to play out with Friday’s Nonfarm Payrolls print. U.S. employers added a seasonally adjusted 175,000 jobs in April, the Labor Department reported. The April figure was far less than in March when gains exceeded 300,000, and it was also below the 240,000 economists had expected. The unemployment rate ticked up to 3.9% from March’s 3.8%. Wages also rose less than anticipated, increasing 3.9% from a year earlier after rising 4.1% in March. Signs of a cooling labor market reignited expectations for rate cuts in 2024, with the first cut expected in September.

Agency commercial mortgage-backed securities (CMBS) spreads rallied this week, reversing the effects of the supply glut the market experienced a few weeks ago. While rate volatility had been above average thanks to the Dr. Powell / Mr. Jerome push and pull we’ve been experiencing, the recent relief rally has helped push 10-year yield briefly back below 4.50%. The stall in Nonfarm Payrolls and uptick in unemployment is likely going to exacerbate the whipsaw effect known as “When will the Fed cut rates?” as well. The market appears poised to overreact to normally inconsequential data points, which will continue to drive heightened levels of volatility in the short term until the Fed can give more concrete guidance on what “greater confidence” means. In the meantime, hit the relief rally while it’s here, especially as spreads have reversed their widening trend.