What Fed Cuts Mean for the Muni Market

The Federal Reserve is in the early stages of a rate cutting cycle. There is an ongoing debate about the size of the next cut and the terminal rate, however there is consensus that there are more cuts coming. A lower Federal Funds rate will likely affect the municipal market directly and indirectly in a number of ways:

• Yield curve inside of ten years will likely continue to steepen,
• Lower rates for Money Market Funds (MMFs) and Certificates of Deposit (CDs) are likely to increase flows into longer duration municipal bonds,
• Better flows will likely support further spread tightening for lower-rated credit, and
• Lower rates in general should be supportive of the economy which could help avoid a recession in the near-term while being supportive of fundamental municipal credit.

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