The Federal Reserve's interest rate cuts fail to stop the bond market sell-off, with key yields surging, highlighting policy divergence

The Zhitong Finance APP noted that Federal Reserve Chairman Jerome Powell dismissed the bets of bond traders—who expect the Fed to prevent a U.S. economic slowdown through a series of aggressive rate cuts.

Although the Fed lowered the benchmark interest rate by 25 basis points as widely expected and anticipates two more such cuts this year, the Fed chairman indicated that he has not abandoned a cautious stance and remains vigilant about inflation risks. Policymakers also did not yield to pressure from U.S. President Donald Trump for larger rate cuts, with the only dissent coming from a White House advisor recently appointed to the Fed Board.

Bond traders believe this stance indicates that even with a faltering job market, the path of monetary policy is far from certain. As a result, the brief rally in Treasury bonds following the Fed's initial decision gradually faded, pushing the 10-year yield up 6 basis points to 4.09% by the end of U.S. trading.

"The market's expectation of deep rate cuts is not a foregone conclusion," said Tracy Chen, a portfolio manager at Brandywine Global Investment Management. "This 25 basis point cut is a precautionary cut, a risk management cut."

Since Powell hinted last month that he was ready to cut rates again after maintaining policy throughout the year, the bond market has been on a strong upward trend. Some traders have even begun to bet that the Fed will implement a half-point cut before the end of the year.

This has led to high expectations for this meeting and has sown the seeds for a potential pullback in the bond market—one that has been caught off guard multiple times by the Fed's actions since the end of the pandemic. There is also speculation that Trump's pressure could drive some to push for larger rate cuts, creating divisions within the Fed Board.

Powell made it clear that he is prepared to ease policy to prevent further deterioration in the labor market, stating that he no longer considers the labor market to be "very solid." However, he emphasized that the Fed is far from being in a firefighting mode and stated that it still needs to ensure that Trump's tariffs do not reignite inflation, and that policymakers remain in a "meeting-by-meeting decision-making context."

These comments pushed the two-year Treasury yield (the most sensitive term to Fed policy changes) up 5 basis points to 3.55%, with similar increases across other maturities. The dollar rose alongside the yields.

The Fed lowered its policy rate to a range of 4% to 4.25%, with the impact of its quarterly updated forecasts exceeding this move.

According to the median forecast, the new dot plot indicates two more rate cuts this year and one more in 2026. In comparison, the median forecast from June showed a total of two rate cuts this year, a 25 basis point cut in 2026, and another cut in 2027 “It's not considered hawkish, but it's more hawkish than the market expected,” said Brett Bark, co-head of global rates at TCW Group. “The Federal Reserve hasn't really acknowledged the market's pricing. The key point is that Powell still describes this rate cut as a risk management cut. They haven't hinted at a series of rate cuts in the future.”