By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – Bond investors, who expect the Federal Reserve to cut interest rates by a quarter of a percentage point on Wednesday, are bracing for a reversal of central bank easing in 2025 in anticipation of higher inflation under the administration. Trump.
Market players are staying out of longer-dated Treasuries as US inflation already looks firmer and they prefer to hold notes at the front to the middle of the curve, somewhere between two- and five-year bonds.
Fears of higher inflation typically lead to a sell-off on the long side, pushing yields higher as investors demand a premium to compensate for the risk they hold.
The Fed is widely expected to cut overnight rates by 25 basis points to the target range of 4.25%-4.50% at the end of a two-day policy meeting starting Tuesday. But what it does after this week’s meeting is an open question.
At least one bank – BNP Paribas – expects the Fed to keep rates stable throughout the year and resume interest rate cuts in mid-2026. Others see a reduction in financing costs of two or three quarters of a percentage point.
“An aggressive cut is consistent with what the numbers will look like, but also with potential policy changes from the new administration,” said George Bory, chief fixed income investment strategist at Allspring Global Investments.
“The Fed is trying to prepare the market for a slowdown in the pace of rate cuts and… increase its ability to monitor the data and be prepared for policy changes.”
Recent data shows that the US economy is resilient: a labor market that continues to create jobs and inflation, which remained too high to be comfortable in November. U.S. consumer prices rose 0.3% for the fourth month in a row in November, signaling that progress toward the Fed’s 2% inflation target has stalled.
Investors will also focus on the quarterly economic projections from Fed policymakers, including interest rate forecasts, also known as the “dot plot,” which shows how much easing is expected. The ‘dots’ from the September meeting, when the Fed started its easing cycle with a 50 basis point cut, showed a policy rate of 3.4% at the end of 2025.
The Fed raised rates by 5.25 percentage points between March 2022 and July 2023, pushing the policy rate to the 5.25%-5.50% range, to counter a rise in inflation.
“The Fed will be less forgiving in its summary of economic projections than it was in September, which is appropriate given the comments (Fed Chairman Jerome) Powell made that the economy is stronger than he thought when they cut by 50 basis points.” said Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, referring to the central bank’s rate cut in September.
