The United States officially announced a 2 basis point interest rate cut in September this year, which was the first rate cut since 2020, which excited the market. The market is currently paying close attention to whether the Fed will cut interest rates again in the remaining two meetings this year.

Fed mouthpiece: Trump's election could lead to a resurgence of inflation

One of the keys to whether the Fed can successfully cut interest rates is that the United States must continue to move towards a 2% inflation rate.

However, Nick Timiraos, a reporter for the Wall Street Journal known as the "Fed mouthpiece," recently pointed out that the decline in inflation is mainly attributed to the Federal Reserve's interest rate hikes, supply chain improvements and labor force growth, but whether borrowing costs and prices can continue to slow in the future will depend on the policy choices of Trump or Harris.

Timiraos pointed out that although both candidates support economic growth policies, economists and conservative advisers are worried that Trump's policies (such as comprehensive tariffs, deportation of illegal immigrants, and pressure on the Federal Reserve to cut interest rates...) may be more likely to lead to a resurgence of inflation.

Kamala Harris plans to address the high cost of living by increasing housing construction, cracking down on price gouging, and expanding child tax credits. Although there is also a lack of specific plans to reduce the deficit, scholars believe that if the Democrats continue to govern, inflation may remain stable but slightly higher.

U.S. Treasury yields rebounded to 4.28%

The United States will soon hold a presidential election on November 5. Some people are worried that if the Trump administration comes to power, it will have to borrow a lot of money to cash the election checks written during the campaign. The federal government debt and deficit will rise sharply, forcing Congress to raise the debt ceiling, which may be the reason for the recent sell-off in the bond market.

As can be seen from the figure below, the 10-year U.S. Treasury bond yield is still rising and has hit a three-month high, which may put pressure on the Federal Reserve's decision on the next interest rate cut.

Why do U.S. Treasury yields continue to rise?

Why has the US Treasury yield continued to rise recently when the Fed has started a rate cut cycle? Experts analyze the possible reasons:

  • The U.S. Treasury Department continues to issue bonds to fill the government deficit (plus some people worry that if Trump returns to the White House, the U.S. fiscal deficit may increase again)

  • The Fed is trying to shrink its balance sheet, eliminating a large amount of demand for Treasury purchases.

  • Recent economic data shows that the effectiveness of deflation remains stalemate

The latest data from CME's Fed Watch tool shows that the market currently believes that the probability of maintaining the current interest rate at 4.75% to 5% in November has dropped to 4.9% from a week ago, while the probability of a 1 basis point interest rate cut to 4.5% to 4.75% has increased to 95.1%. Most people are still betting that the Fed will continue to cut interest rates.