Traders Sense an Inflation-Constrained Fed Is Back

The Federal Reserve is widely expected to lower its benchmark federal funds rate by a quarter of a percentage point on Thursday to a range of 4.5% to 4.75%. The big question is how much lower the Fed might go from there during this rate-cutting cycle. The bond market suggests it won’t be as low as some expect or as low as policymakers signaled less than two months back.

So says the yield on two-year Treasuries, which tracks the fed funds rate closely, but often in anticipation of what the Fed will do. It’s been a good predictor historically. Most recently, it signaled in 2021 that the Fed would raise rates to fight inflation months before policymakers moved. It also turned lower several months before the central bank began easing policy in September.