Traders see an interest-rate cut next month as a coin toss as resilient economic data empowers Federal Reserve officials to take a potentially more-cautious approach to easing.
In the swaps market, traders on Friday priced in a roughly 50% chance that the Fed delivers a quarter-point reduction at its December gathering, down from about 80% earlier in the week. The 10-year Treasury yield surged to touch 4.5%, the highest since May 31, while the policy-sensitive two year’s rose to 4.37% in wake of retail sales data that included large upside revision to the prior month’s figure.
The market had begun paring back expectations for a December reduction on Thursday after Fed Chair Jerome Powell said economic resilience gave officials room to ease more carefully — a point his colleague Susan Collins echoed on Friday. She told the Wall Street Journal the Fed will eventually need to slow the pace of rate cuts, though a move next month was still on the table.
“There’s little support for Fed easing,” said Bob Sinche, a longtime markets veteran and strategist at Global Macro & Markets. “Chair Powell raised uncertainty about the need for a December rate cut and data out today do not point convincingly in favor of an immediate rate reduction.”
The Chicago Fed’s Austan Goolsbee, meanwhile, said as long as inflation continues down toward the central bank’s 2% goal, interest rates will be “a lot” lower over the next 12 to 18 months. New York Fed President John Williams was also slated to speak on Friday.
To Guy LeBas, chief fixed income strategist for Janney Montgomery Scott, a 25-basis-point reduction next month remains likely, though the path beyond is less certain. Traders on Friday also pared back their expectations for cuts throughout 2025.
“I think they will skip doing anything in January,” he said. “The Fed will probably slow the pace at that point, to maybe quarterly cuts thereafter.”
Yields of all maturities were higher on Friday, with the benchmark 10-year rate up about 18 basis points for the week. The rise in long-term rates outstripped increases on shorter-tenors, keeping the trend for the week of sparking a steepening of the yield-curve. Concern over over Donald Trump’s US sweeping election victory and amped up fiscal spending has weighed more heavily on long term bonds.
A Bloomberg gauge of the Treasury market’s returns fell this week, leaving the index up just 0.6% so far this year.
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