The United States officially announced a 2-point rate cut in September this year, the first rate cut since 2020, which excited the market. The market is now closely watching whether the Fed will further cut interest rates in the remaining two meetings this year.
The Fed Mouthpiece: Trump's Election May Reignite Inflation
One of the key factors for the Fed to successfully cut rates is that the United States must continue to move towards a 2% inflation rate.
However, Nick Timiraos, a reporter for the Wall Street Journal, who is known as the "Fed mouthpiece," recently pointed out that the decline in inflation is mainly due to the Fed's rate hikes, improvements in the supply chain, and growth in the labor force, but whether borrowing costs and prices can continue to slow down will depend on the policy choices of Trump or Kamala Harris.
Timiraos pointed out that although both candidates support economic growth policies, economists and conservative advisers are concerned that Trump's policies (such as across-the-board tariffs, deporting illegal immigrants, and pressuring the Fed to cut rates...) may pose a greater risk of reigniting inflation.
Kamala Harris, on the other hand, plans to address the high cost of living through measures such as increasing housing construction, cracking down on price gouging, and expanding child tax credits, although she also lacks a specific plan to reduce the deficit. Scholars believe that if the Democratic Party continues to govern, inflation may remain stable but slightly higher.
US Bond Yield Rises to 4.28%
The United States will soon hold the presidential election on November 5th. Some are concerned that if the Trump administration takes office, it may have to borrow heavily to fulfill the campaign promises made during the election, causing the federal government's debt and deficit to soar rapidly, forcing Congress to raise the debt ceiling, which may be the reason for the recent bond market sell-off.
The chart below shows that the 10-year US Treasury yield has continued to rise, reaching the highest level in three months, which may put pressure on the Fed's next rate cut decision.
Why is the US Bond Yield Continuing to Rise?
Why has the US bond yield continued to rise against the backdrop of the Fed's rate cut cycle? Experts analyze the possible reasons:
- The US Treasury Department is constantly issuing debt to fill the government's budget deficit (plus some are concerned that if Trump returns to the White House, the US fiscal deficit may increase again)
- The Fed is trying to shrink its balance sheet, eliminating a large amount of demand for government bonds
- Recent economic data shows that the progress in taming inflation remains sluggish
The latest data from the CME Group's FedWatch tool shows that the market currently believes the probability of maintaining the current 4.75% to 5% rate in November has decreased to 4.9% from a week ago, while the probability of a 1-point rate cut to 4.5% to 4.75% has increased to 95.1%. Most people are still betting that the Fed will continue to cut rates.
