The Federal Reserve initiated interest rate cuts three months ago, but rather than stabilizing markets, these actions have instead intensified their activity.
Since the Fed's initial rate reduction of this cycle in September 2024, the benchmark Treasury 10-year yield has increased by 0.5 percentage points, currently standing at 4.1%. Concurrently, the 30-year Treasury yield has risen by over 0.8 percentage points, according to data from TradingView.
Typically, a reduction in the Fed's rates is accompanied by a decrease in long-term yields. Even during the two non-recessionary easing cycles in 1995 and 1998, which involved rate cuts of only 75 basis points, the 10-year Treasury yield did not experience such a significant spike.
Fed Faces Political Pressure Amidst Potential New Chair Selection
Donald Trump has been vocal in advocating for more rapid rate cuts, asserting that such measures would lower yields and subsequently reduce interest rates on mortgages, credit cards, and other forms of borrowing. However, this theory has not materialized as expected.
Adding to market uncertainty, Trump is nearing the point where he can appoint a new Federal Reserve Chair, a prospect that has kept financial markets on edge. If the Fed succumbs to political pressure and accelerates its rate-cutting trajectory, it risks undermining its credibility, potentially fueling inflation, and driving yields even higher.
The Federal Reserve has already lowered its benchmark rate by 1.5 percentage points, bringing it to a range of 3.75% to 4%. An additional 0.25% cut is anticipated this week, with traders also factoring in two more reductions in 2026, which would bring the target rate closer to 3%.
Despite these rate reductions, borrowing costs for consumers and businesses have not seen a corresponding decline. Treasury yields, which serve as the foundation for most loan interest rates, are instead moving in the opposite direction.
Jay Barry, who directs global rates strategy at JPMorgan, suggests that this divergence stems from two primary factors. Firstly, financial markets anticipated the Fed's pivot towards easing months in advance. Yields reached their peak in late 2023, well before the actual rate cuts commenced, meaning the impact of monetary easing was already "priced in."
Secondly, Barry notes that the Fed is implementing rate cuts while the economy remains robust. Inflation has not decreased sufficiently, preventing rate cuts from translating into lower yields because there is a lack of significant concern regarding a deep recession.
Fed Officials Divided Amidst Lagging Inflation Data and Shifting Labor Market
There is a lack of consensus among Federal Reserve officials regarding the future path of monetary policy. Boston Fed President Susan Collins, Kansas City Fed President Jeff Schmid, and Chicago Fed President Austan Goolsbee have all cautioned against prematurely implementing further rate cuts.
Goolsbee expressed concerns about the risks associated with "frontloading" easing measures while inflation remains above the Federal Reserve's 2% target. In contrast, New York Fed President John Williams, who also serves as the vice chair of the Federal Open Market Committee (FOMC), has indicated his openness to supporting a rate cut in the near future.
The arrival of inflation data has been delayed due to the government shutdown that occurred in October and November. The most recent Personal Consumption Expenditures (PCE) index reading, which is the Fed's preferred inflation gauge, was released two months later than usual. In September, core inflation, excluding volatile food and energy prices, stood at 2.8%, a slight decrease from August's 2.9%.
Officials project that inflation will settle at 3.1% by the end of the year, a level still considerably above the target rate. Employment data has also presented a confusing picture. Following a loss of 4,000 jobs in August, payrolls increased by 119,000 positions in September. The trend has been volatile, with negative job growth in June, a rebound in July, another decline in August, and a recovery in September, making it difficult to ascertain a clear direction.
The Federal Reserve's Beige Book report provided updated insights for early November. It indicated an increase in layoffs, companies freezing hiring plans, and reductions in working hours. Several firms reported that artificial intelligence was displacing entry-level staff or enabling existing workers to achieve greater output with fewer resources, thereby diminishing the need for new hires.
Chair Powell is scheduled to conduct his post-meeting press conference on Wednesday. At this event, the Federal Reserve will also release its quarterly projections, offering Wall Street an outlook on where officials anticipate interest rates will be positioned in 2026.