Policy-sensitive U.S. Treasury yields jumped as traders scaled back expectations for a December rate cut after Federal Reserve Chairman Jerome Powell said the economy's resilience gave officials room to ease policy more cautiously.

The two-year Treasury yield rose as much as 8 basis points to 4.36% as Powell spoke from prepared remarks in Dallas on Thursday. Swap traders cut the probability of a Fed rate cut on Dec. 18 to below 60% from about 80% a day earlier. The dollar index rose for a fifth straight session on Thursday.

“The market’s pricing of risk on the Fed’s policy path felt two-sided on Thursday,” said Zachary Griffiths, head of U.S. investment grade and macro strategy at CreditSights. “Powell’s speech was more hawkish as he took a risk-management approach to future policy.”

Powell said the U.S. economy is not sending any signals that policymakers need to rush to cut interest rates, but he did not comment on the possibility of a rate cut at the December meeting. "If the data warrants us to slow down, then it would seem prudent to slow down a little bit," Powell said during a question-and-answer session.

Traders have been recalibrating their bets on the next Fed rate cut in recent days, raising the odds on Wednesday of a December rate cut after October CPI came in line with expectations.

While swap markets are still leaning toward a December rate cut, the outlook for 2025 has become more uncertain. Wall Street economists have also lowered their forecasts for where rates will go next year following Trump’s victory in the presidential election last week and the Fed’s latest quarter-point rate cut.

Michael Feroli, chief U.S. economist at JPMorgan Chase, said Powell's speech may suggest that the Fed will slow down the pace of rate cuts before March next year. He wrote: "We still believe that the FOMC is likely to cut interest rates in December. But today's speech opens the door to slowing the pace of easing as early as January next year."

Gennadiy Goldberg, head of interest rate strategy at TD Securities, also said: "Powell's speech opened the door to slowing the pace of rate cuts, which could keep interest rates higher for longer than investors expect."

“Powell’s speech was hawkish,” said Neil Dutta of Renaissance Macro Research. “I think they will still cut in December because policy remains restrictive and they want to get to a neutral setting. That said, on the economic front, I think Powell (and the broader consensus) is complacent. The downside risks in the near term are greater than people realize.”

Article forwarded from: Jinshi Data