TLDR
- Signs of sticky inflation and slowing US economic growth are raising questions about the Federal Reserve’s interest rate decisions
- The Fed may still cut interest rates four times in 2025, but most likely in the second half of the year
- Treasury investors are betting the Fed will shift focus from inflation concerns to growth risks
- Consumer confidence is declining, and nearly one-third of US workers worry about layoffs
- Policy uncertainties around trade, immigration, and fiscal decisions are creating market uncertainty
Treasury yields have fallen to their lowest levels of 2025 as investors increasingly bet that the Federal Reserve will soon shift its focus from fighting sticky inflation to addressing slowing economic growth.
The 10-year Treasury yield dipped to around 4.24% before edging higher to 4.28% in recent trading. Bonds have rallied for six straight sessions amid growing economic concerns.
Traders are now pricing in two quarter-point cuts by the Fed this year, and most of a third cut by early 2026, bringing rates to around 3.65%. This marks a shift in market sentiment from earlier concerns about persistent inflation.
Recent economic data has pointed to a potential slowdown. A steep drop in consumer confidence reported this week adds to evidence that the US economy may be losing momentum.
Nearly one-third of US workers now report concerns about potential layoffs, according to a new Federal Reserve Bank of Philadelphia survey. This suggests growing unease in the labor market.
The Citigroup index of US economic surprises has fallen to its lowest level since September, indicating economic data is consistently falling short of expectations. This trend is reinforcing investor concerns about growth.
TD Securities forecasts four Fed rate cuts in the second half of 2025
TD Securities still forecasts four Fed rate cuts in the second half of 2025. “We’re definitely seeing a little bit of a stagflationary pricing,” noted Gennadiy Goldberg, Head of US Rate Strategy with TD Securities.
Investors are closely watching this week’s release of the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge. Friday’s report could prove decisive in shaping expectations.
Morgan Stanley strategists believe the 10-year yield could fall below 4% if markets begin pricing in a Fed funds rate drop to 3.25%. The bank expects the PCE data to show declining price growth.
Policy uncertainty from Washington is adding to market concerns. Investors worry about potential trade disruptions, immigration changes, and fiscal policy shifts under the Trump administration.
Proposed tariffs on major trading partners like Canada, Mexico, and the European Union have raised economic growth concerns. Similar policies during Trump’s first term negatively impacted economic growth.
Recent federal spending cuts through government worker dismissals may allow interest rate expectations to decline, according to Morgan Stanley. However, proposed tax cuts could widen the budget deficit.
A budget blueprint passed by House Republicans calls for deep spending cuts as an offset to potential tax reductions. This fiscal uncertainty adds another layer of complexity for investors.
All three fixed-rate Treasury auctions this week drew strong demand, including Wednesday’s seven-year note sale. The $44 billion auction drew a yield of 4.194%, indicating robust investor interest.
Treasury investments have outperformed stocks so far this year. A Bloomberg gauge of Treasury returns has gained 2.3% year-to-date, compared to the S&P 500’s 1.3% rise during the same period.
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