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As the Federal Reserve wraps up its two-day meeting, US Treasury yields have inched higher in anticipation of a 25 basis point rate cut amidst ongoing concerns about inflation.
What does this mean?
The Federal Reserve is likely to reduce interest rates by 0.25%, with a focus on Jerome Powell's press conference and updated economic projections that will influence expectations for 2025 and beyond. Analysts expect Powell to maintain a hawkish stance, reaffirming the Fed's commitment to a data-driven strategy due to inflation still exceeding the 2% target. The unforeseen 0.7% increase in November's retail sales, surpassing expectations, is unlikely to alter the Fed's projected rate decision. Meanwhile, revisions to the 'dot plot' may indicate a cut in next year's rate reductions, possibly trimming the anticipated 100 basis point decrease to 75 or 50 basis points.
With Treasury yields peaking, speculation hints at potential 75 basis points in rate cuts next year, offering a buffer for short-term rates. The yield curve between the two- and 10-year notes remains stable, reflecting steady market expectations despite slight yield changes.
The bigger picture: In the shadow of inflation.
Inflation might be easing, but the Fed's approach stays cautious. Upcoming Personal Consumption Expenditures data is expected to report modest price increases, framing the broader economic environment the Fed navigates. Analysts are keenly observing how these numbers fit with global economic trends and whether they might provoke more aggressive monetary actions.