Jerome Powell’s caution dashes bond market bets on aggressive rate cuts
While the central bank lowered its benchmark rate by a quarter percentage point, as widely expected — and pencilled in two more such moves this year — the Fed chair indicated he’s not abandoning his cautious approach, still mindful of the risks of inflation. Nor did policymakers buckle to pressure from Donald Trump to lower rates more deeply, with the only dissent coming from the White House adviser the president just named to the board.
The stance was seen by bond traders as signalling that the path of the monetary policy remains far from certain even as the job market sputters. As a result, the brief Treasury rally that followed the Fed’s initial decision fizzled, driving up 10-year yields by 6 basis points to 4.09% by the end of the US trading day.
“The deep cuts that the market is expecting are not a done deal,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management. “This 25-basis-point cut is an insurance cut, a risk-management cut.”
The bond market had rallied strongly since Powell telegraphed last month that he was ready to resume cutting interest rates again after keeping policy on hold all year. Some traders even started betting that the Fed would resort to half-point cuts before the year is out.
That created high expectations coming into the meeting and sowed the risk of another pullback in the bond market, which has been caught offsides by the Fed’s moves several times since the end of the pandemic. There was also speculation that Trump’s pressure would create a divide on the Fed’s board by driving some to push for a steeper cut.
Powell made it clear that he’s prepared to ease policy to head off a deterioration in the labor market, which he said he would no longer consider “very solid.” But he underscored that the Fed is far from shifting into fire-fighting mode, saying that it still needs to ensure that Trump’s tariffs don’t rekindle inflation and that policymakers remain in a “meeting-by-meeting situation.”
The comments pushed up two-year Treasury yields — the most sensitive to the outlook for Fed policy changes — by 5 basis points to 3.55%, with similar increases across other maturities. The dollar tracked yields higher.
The Fed’s move — which reduced its policy rate to a range of 4% to 4.25% — was outweighed by the quarterly update of its forecasts.
The new dot plot indicated two more cuts this year and one in 2026, according to the median projection. That compared to June’s median projections, which showed two total cuts for all of this year and one quarter-point move in 2026 and one in 2027.
“It’s not hawkish, but it is more hawkish than markets were expecting,” said Bret Barker, the Co-Head of Global Rates at TCW Group. “The Fed is not really validating the market’s pricing. The key part is that Powell described this as a risk management cut still. They didn’t hint at a series of cuts going forward.”
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