Muzinich Weekly Market Comment: No brainer?
Insight
September 8, 2025
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In our latest roundup of the key developments in financial markets and economies, we dig deeper into the divide between the US administration and Federal Reserve and whether rising government debt could crowd out private investment.
It has been a sluggish start to September, with weak seasonals weighing on sentiment. Financial asset prices were stuck in holding mode for most of last week ahead of a series of key events: Friday’s US non-farm payrolls (NFP) report for August; the legal judgment on Federal Open Market Committee (FOMC) member Lisa Cook; the Senate’s approval of Trump’s Council of Economic Advisers chair Stephen Miran onto the FOMC, and the French government’s confidence vote on September 8.
These developments are considered critical inputs that could drive fixed income markets through the remainder of 2025 and into 2026.
The Trump administration has made it clear that it wants and expects policy rates to be much lower. In its economic plan, the administration projects 3% growth, aiming to achieve this through tax breaks, deregulation in the finance and energy sectors, encouraging domestic investment, and boosting exports.[1] Lower policy rates can support this agenda by boosting confidence, pushing asset prices higher, weakening the dollar as investors search for higher returns, and reducing domestic borrowing costs. Cheaper financing supports business investment and household consumption, while lower interest expenses should ease government fiscal pressures and help narrow the deficit.
To put the administration’s frustration into perspective, in the 2024 fiscal year, the government’s net interest expense hit US$879.9 billion - 13% of total federal spending.[2] More was spent on interest payments than on Medicare, making debt service the third-largest expenditure. At the same time, while the administration is targeting 3% growth, it also wants to lower the fiscal deficit to 3% of GDP; the current level is more than twice that.[3]
Administration versus Fed
Against this backdrop, cutting interest rates is the proverbial ‘no brainer’ from the administration’s perspective. However, its objectives are clashing with those of the Federal Reserve, whose mandate is to use monetary policy to achieve maximum employment and stable prices, targeting 2% inflation to foster sustainable economic growth and financial stability. Fed monetary policy is currently slightly restrictive, reflecting efforts to control inflation. According to the Fed’s latest staff projections, core personal consumption expenditure (PCE) inflation is expected to finish the year at 3.1%, missing the target. By the end of 2027, inflation is forecasted to remain slightly above target at 2.1%.[4]
Dovish members of the FOMC argue price pressures are transitory, largely driven by the administration’s one-off tariff agenda, and that policymakers should look past any short-term spike in favour of the long-term trend. In contrast, more conservative members note that the July PCE report showed the price pick-up was driven by services rather than goods, and that the short-term trend does not support loosening policy. On a one- and three-month annualized basis, core PCE inflation ticked higher to 3.3% and 3.0% in July, respectively.[5]
This leaves the employment objective as the only rational for lowering interest rates - and there are warning signs this is under pressure. Taking a broad measure of slack in the US labour market shows that supply exceeds demand by more than any time in over four years. Including the discouraged cohort among those available to fill vacancies puts the ratio of unemployed workers versus job openings at its highest level since March 2021, approaching 25.[6] Meanwhile, June’s NPF report left three-month average job growth at 35k, below the necessary level to keep employment stable.[7]
Geopolitical uncertainties, particularly around tariffs, and the rise of artificial intelligence are being cited as drivers of declining labour demand from companies. For example, in a recent interview, Salesforce CEO Marc Benioff revealed the company had cut approximately 4,000 customer service roles as AI agents take over many tasks, following similar initiatives at Klarna and Microsoft.[8]
The August NFP report further validated economists’ concerns: only 38,000 jobs were created, while unemployment rose to 4.3%, its highest level since 2021.[9] The overnight interest rate swap market is now pricing an 89% probability that the FOMC will deliver 25 basis points cuts at each of its final three meetings this year, which would lower policy rates to a terminal rate of 3%.[10]
Crisis of confidence
As for the upcoming no-confidence vote in the French government, the most likely outcome is that President Macron will appoint a new Prime Minister. However, the main concern for investors is not the current political paralysis in France, but a broader fear it is becoming almost impossible for governments to implement fiscal tightening, either by cutting spending or raising revenue via taxes.
This is particularly worrying given that most developed nations are running exceptionally high fiscal deficits. However, this is not a new problem: the last time the UK and US ran a fiscal surplus was in 2001, for France it was 1975; for Italy, it has been 100 years (See ‘Chart of the Week’).[11]
It is a very slow process, but with budgets unbalanced for decades, the stock of debt has continued to grow.[12] Some argue that over the next decade, indebtedness, as measured by debt-to-GDP, could become unsustainable. The worry is that it will reduce long-term growth potential as an ever-increasing share of government revenue is spent on interest payments and the growing stock of debt crowds out more efficient investment opportunities in debt markets.
This concern is playing out in the long end of government bond curves. Last week, the US 30-year Treasury yield briefly touched 5%, while 30-year German, French and Dutch bonds reached their highest levels since the euro sovereign debt crisis in 2011. The UK 30-year gilt yield hit its highest level since 1998, and 30-year Japanese government bond yields reached record highs.[13]
Perhaps the Trump administration is onto something - cut rates and focus on growth and employment, in line with the principles of Modern Monetary Theory (MMT). With Stephen Miran likely in place before September’s FOMC meeting and Biden’s representative Lisa Cook potentially replaced along with Chair Powell, whose tenure ends in May 2026, we could be witnessing the start of the next evolution in US monetary policy. One potential adjustment might be to reconsider the Fed’s inflation target, raising it above the current 2% level.
Chart of the Week: A century without a fiscal surplus (Italian budget deficit as % of GDP)
Source: Deutsche Bank, as of September 5, 2025. For illustrative purposes only.
Past performance is not a reliable indicator of current or future results.
References
[1] Fox Business, ‘Treasury secretary nominee Scott Bessent's '3-3-3' plan: What to know,’ November 25, 2024
[2] Pew Research Center, ‘Key facts about the US national debt,’ August 12, 2025
[3] US Treasury, ‘What is the national deficit?’ as of September 5, 2025
[4] Federal Reserve, ‘Summary of Economic Projections,’ June 18, 2025
[5] Bureau of Economic Analysis, ‘Personal Consumption Expenditures Price Index,’ August 29, 2025
[6] Bloomberg, ‘Gloomy workers amplify labor slack,’ September 3, 2025
[7] US Bureau of Labor Statistics, ‘Employment Situation Summary,’ September 5, 2025
[8] Fortune, ‘Salesforce CEO Marc Benioff says his company has cut 4,000 customer service jobs as AI steps in,’ September 2, 2025
[9] US Bureau of Labor Statistics, ‘Employment Situation Summary,’ September 5, 2025
[10] Bloomberg, ‘World interest rate probabilities,’ as of September 5, 2025
[11] Deutsche Bank, ‘Back to work… until Xmas!’ September 2025
[12] International Monetary Fund, ‘Debt is Higher and Rising Faster in 80 Percent of Global Economy,’ May
[13] Bloomberg, ‘Why Long-Term Bond Yields Are Up in the US, UK and Japan,’ September 3, 2025
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Reference to the names of each company mentioned in this communication should not be construed as investment advice or investment recommendation of those companies. The opinions expressed by Muzinich & Co. are as of September 8, 2025, and may change without notice. All data figures are from Bloomberg, as of September 5, 2025, unless otherwise stated.
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