US Treasury yields rise as Fed’s wait-and-see message sinks in
U.S. Treasury yields rose on Thursday as traders pared bets on interest-rate cuts from the Federal Reserve after Chair Jerome Powell said he won’t be rushed into lowering borrowing costs.
The policy-sensitive two-year rate climbed four basis points to 3.82%, narrowing the gap to its 10-year peer to 48 basis points, near the smallest level in a month. Powell said on Wednesday the central bank needs more certainty on the direction of trade policy before making a move.
Treasuries initially gained after the Fed decision, as investors focused on the risk mentioned by policymakers that trade-related uncertainty could lead to stagflation. But on Thursday, attention turned to Powell’s message that the U.S. central bank will wait and see how things evolve.
“We are still of the view that the Fed will be on hold for some time, at least until there is more certainty about tariffs and their impact on the U.S. economy,” said Evelyne Gomez-Liechti, a strategist at Mizuho. “The market should keep pricing out some of the cuts.”
Fed officials voted unanimously to keep the benchmark federal funds rate in a range of 4.25% to 4.5%, where it has been since December. Swaps priced in a 20% chance of a quarter-point rate cut at the next meeting in June, compared to about 30% on Tuesday and more than 50% a week ago. Markets continued to bet on three reductions this year, which would bring rates to a range of 3.5% to 3.75%.
In a statement, policymakers said they see a growing risk of higher inflation and rising unemployment. President Donald Trump’s trade policy has unleashed a wave of uncertainty across the economy. While the levies are still being negotiated, economists widely expect the expansive tariffs to boost inflation and weigh on growth.
Trump criticized the Fed’s policy stance again on Thursday, saying there’s virtually no inflation in the US and that Powell “doesn’t have a clue.” The president has been calling for the central bank to lower interest rates to boost the economy, and even suggested he could remove the Fed Chair before the end of his term.
Pimco’s Chief Investment Officer Dan Ivascyn said in an interview with the Financial Times the probability of a US economic recession is the highest in a few years. The firm has made small increases to its US Treasury holdings over the previous two months, focusing on short maturities.
“With the outlook clouded by tariff uncertainty, we expect the Fed to maintain a wait-and-see approach, seeking greater economic and policy clarity before making any major policy moves,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. He forecasts 100 basis points of rate cuts from the Fed starting in September.
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