As the annual Christmas season approaches, the US Treasury market brings 'bad news' as long bond yields hit a seven-month high, all thanks to Powell's 'Christmas gift' - a hawkish rate cut.
Overnight, the yield on the US 10-year benchmark Treasury bond briefly broke above 4.6%, reaching the highest level since May, rising about 20 basis points since last week's Fed rate cut, before slightly retreating at the close. The 30-year Treasury yield also turned lower after reaching its highest level since late April, while the 2-year Treasury yield remained stable in the range of 4.33% to 4.363%.
On Wednesday, the US stock and bond markets will be closed due to the Christmas holiday.
The trend, which is not very in line with the festive atmosphere, can be attributed to Powell's 'Christmas gift' - a hawkish rate cut.
Last week, the Fed lowered its rate cut predictions, implying only two more cuts in 2025, down from the four cuts suggested in September. The futures market currently expects the federal funds rate to reach around 4% by the end of next year, indicating one to two rate cuts.
Several financial institutions have provided different interpretations of the Fed's policy stance, with Standard Chartered analyst Steve Englander stating that:
Both we and the market were surprised by the strong tone emerging from the FOMC's economic forecast changes, which is clearly a risk-off event...
Fed Chairman Powell's main explanation for this shift was the rise in core inflation data over the past two months, although he noted that some forecasts have already taken into account the expected impact of the incoming Trump administration's policies. Raising the core PCE inflation rate for 2025 from 2.2% to 2.5% is particularly noteworthy - only three participants believe that the core inflation rate will be below 2.4% or lower, thus rounding down cannot achieve the target for the 2025 forecast.
TS Lombard analyst Steven Blitz is celebrating victory; he believes that:
The market feels uneasy because the Federal Reserve did not act as they expected, but the Fed did exactly what we have always anticipated - lowering the funding rate to 4.25% in accordance with the Taylor rule between September and the end of the year, and that the rates will remain at this level until there is a substantial change in the economy. I wrote about this again last July and September.
Once inflation falls below the funding rate and employment starts to slow down, considering that inflation is ultimately a lagging indicator, the FOMC returned to model-based policy decisions, and guidance on inflation or employment is a smokescreen.
Barclays believes that the Fed Chairman did not seem particularly concerned about the overall strength of the economy during the press conference.
Powell did not focus on the worsening economic or labor market conditions, indicating that FOMC members' concerns about downside risks are not as high as they were in September.