Market Turmoil: Treasury Bonds Plummet Ahead of Fed Decision
As the Federal Reserve prepares to make its highly anticipated interest rate decision, investors are bracing for impact. On Wednesday, longer-dated U.S. Treasury bonds experienced their steepest decline in over a year, dropping more than 2.6%. This sudden sell-off is attributed to rising expectations of wider budget deficits and higher inflation, sparked by Donald Trump’s presidential election victory.
Rising Inflation Fears
Economists agree that Trump’s policies, including tariffs and tax cuts, are likely to drive up inflation. JPMorgan analysts estimate that these measures could increase U.S. inflation by as much as 2.4%. Goldman Sachs chief economist Jan Hatzius predicts that Trump’s policies might keep core inflation above 3% by 2025, well above the Fed’s 2% target.
Fed Watch: Powell’s Remarks in Focus
While the rate decision itself is almost certain, investors will be closely watching Fed Chair Jerome Powell’s remarks for clues about the Fed’s stance on evolving inflation and fiscal policy. Powell’s tone will be crucial in determining market sentiment, with many expecting a dovish approach.
Labor Market Trends
Bank of America rates analyst Mark Cabana attributes the case for a November rate cut to softer-than-expected jobs data for October, combined with downward payroll revisions. Cabana expects a 25-basis-point cut in November, with Powell likely to maintain an optimistic tone.
Goldman Sachs Forecasts Additional Cuts
Goldman Sachs economist David Mericle highlighted recent inflation data has eased concerns about inflation reaccelerating. Mericle forecasts four additional cuts in the first half of next year, bringing rates down to 3.25%–3.5%. However, he acknowledges uncertainty about both the pace and final rate of future cuts.
Powell’s Independence
During Thursday’s Q&A, Powell will likely face questions about the Fed’s independence, particularly in light of Trump’s previous criticism of Fed policy. Powell’s term expires in 2026, and Trump has hinted that he would not renew his term if re-elected.
Market Reaction
If Powell delivers dovish remarks, risk assets could rally, with the S&P 500 and small-cap stocks potentially extending gains. Conversely, if Powell signals hesitation about further rate cuts, investors could be disappointed, putting downward pressure on the markets.
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