Longer-dated U.S. Treasury bonds followed by popularity iShares 20+ year government bond ETF (NASDAQ:TLT) saw its steepest decline in more than a year on Wednesday, down more than 2.6%, as investors shed fixed-income assets amid rising expectations of wider budget deficits and higher inflation, spurred by Donald Trump‘s victory in the presidential elections.
This bond sell-off comes one day before a crucial Federal Reserve interest rate decision, scheduled for Thursday at 2 p.m. ET.
The Federal Reserve is widely expected to cut rates by 25 basis points to a range of 4.5% to 4.75%, a move fully priced in by market participants, according to the CME FedWatch Tool.
Although the interest rate decision itself is almost certain, investors will focus more on the Fed Chair Jerome Powell‘s comments, which could provide crucial insights into the Fed’s stance on evolving inflation and fiscal policy.
Fed observers are eager to highlight whether a possible shift in fiscal policy under Trump could prompt the Fed to change its approach.
Economists broadly agree that tariffs and tax cuts are likely to push up inflation, potentially leading to a more aggressive response from the Federal Reserve. Analysts at JPMorgan estimate that universal tariffs, combined with domestic tax cuts, could increase U.S. inflation by as much as 2.4%.
Goldman Sachs chief economist Jan Hatzius suggests that Trump’s policies could keep core inflation above 3% in 2025, well above the Fed’s target of 2%. Hatzius emphasized that these factors “could delay the cuts that would otherwise come more quickly.”
Also read: Trump’s historic return: 7 ways his second term could impact the US economy
“We expect a 25 basis point cut in November, with Powell likely to maintain an optimistic tone,” said Bank of America interest rate analyst. Mark Cabana. He explained that weaker than expected jobs data for October, combined with downward wage revisions, were key factors strengthening the case for this November rate cut.
Bank of America also indicated that these labor data trends increase the likelihood of another rate cut in December.
Goldman Sachs economist David Mericle stresses that recent inflation data have allayed concerns about a new acceleration of inflation. “Better inflation news has allayed fears of persistent inflation from earlier this year,” he said. He also highlighted strong GDP growth in the third quarter as a sign of resilience in the US economy despite a cooling labor market.
Goldman Sachs now predicts four additional cuts in the first half of next year, bringing rates down to 3.25-3.5%.
