By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – Bond investors, expecting the Federal Reserve to cut interest rates by a quarter of a percentage point on Wednesday, are bracing for the central bank to scale back its easing in 2025 in anticipation of higher inflation under the Trump administration.
Market players are staying out of longer-dated Treasuries with U.S. inflation already looking stickier, preferring to hold notes on the front end to the middle of the curve, anywhere from two-year to five-year notes.
Fears of higher inflation typically prompt a selloff on the long end, pushing those yields higher as investors demand a premium to compensate for the risk of holding them.
The Fed is widely expected to lower its benchmark overnight rate by 25 basis points to the 4.25%-4.50% target range at the end of a two-day policy meeting that starts on Tuesday. But what it does after this week’s meeting is an open question.
At least one bank – BNP Paribas – sees the Fed holding rates steady all of next year and resuming its rate cuts again in mid-2026. Others see two or three quarter-percentage-point reductions in borrowing costs.
“A hawkish cut is consistent with both what the data will look like, but also potential policy changes from the new administration,” said George Bory, chief investment strategist for fixed income at Allspring Global Investments.
“The Fed is trying to prepare the market for a deceleration in the pace of rate cuts and … increase the optionality to be able to follow the data and be prepared to respond to policy changes.”
Recent data depicted a resilient U.S. economy: a labor market that continues to create jobs and inflation that in November remained too hot for comfort. U.S. core consumer prices rose 0.3% for a fourth consecutive month in November, suggesting progress towards the Fed’s 2% inflation goal has stalled.
Investors will also focus on Fed policymakers’ quarterly economic projections, including rate forecasts, also known as the “dot plot,” which reflects how much easing is expected. The “dots” from the September meeting, when the Fed kicked off its easing cycle with a 50-basis-point cut, showed a policy rate of 3.4% by the end of 2025.
The Fed hiked rates by 5.25 percentage points between March 2022 and July 2023, pushing the policy rate to the 5.25%-5.50% range, to fight an upsurge in inflation.
“The Fed will be less dovish in the summary of economic projections than they were during September, which is appropriate given the commentary that (Fed Chair 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.
