The Bond Market Won't Like These Fed Rate Cuts

The Federal Reserve lowered policy rates on Wednesday, the first reduction of what some investors hope will be a series of subsequent cuts that could bring rates back to around 3% sometime in 2026. Americans may be hoping that the easing will mean lower long-term interest rates for homebuyers, the government and a host of other corporate and household borrowers. Unfortunately, they may be sorely mistaken.

It’s important to recognize recent precedent. When the Fed started cutting rates in 2024 under similar circumstances, yields on 10-year Treasury notes surged. The reasons were multifaceted and included oil market dynamics and Donald Trump’s improving electoral odds, given his economic proposals such as tax cuts and tariffs. Meanwhile, some talking heads argued that yields were rising because the Fed had cut rates erroneously, potentially fanning a new bout of inflation. Whatever one’s ex-post explanation of the market action at the time, the episode served as a stark reminder that the Fed wields limited influence over the longer part of the Treasury yield curve. The bond market has a mind of its own.