Fed's 'Transitory' Inflation View Sends Treasury Yields Tumbling

U.S. government debt continued to rally on Thursday, leading to lower yields across the board, as investors reacted to the Federal Reserve’s assessment that inflation driven by tariffs is likely to be temporary.

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Market Movements

• The yield on the 2-year Treasury declined by 4.5 basis points, settling at 3.934%, down from 3.979% on Wednesday. (Yields and prices move in opposite directions.)
• The yield on the 10-year Treasury dropped by 7 basis points to 4.187%, compared to 4.257% the previous day, approaching one of its lowest levels this year.
• The yield on the 30-year Treasury fell 6.9 basis points, ending at 4.499%, down from 4.568% on Wednesday.

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Key Drivers Behind the Market Moves

Fixed-income investors continued analyzing the Federal Reserve’s latest policy update from Wednesday, particularly comments from Chair Jerome Powell, who suggested that inflation pressures caused by tariffs should be "transitory," similar to what was observed during the first Trump administration.

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According to Chris Low, chief economist at FHN Financial, the Fed is currently operating under the assumption that the impact of the 2025 tariffs will resemble that of 2018’s tariffs. However, the central bank remains cautious, acknowledging the risk that inflation could persist longer than expected this time around. Low added that if inflation trends in line with the Fed’s current projections, interest-rate cuts could resume sooner than markets anticipate.

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In its latest policy announcement, the Federal Reserve lowered its economic growth forecast, citing increased uncertainty about the outlook. Despite raising its inflation expectations, the central bank maintained its forecast for two 25-basis-point rate cuts by the end of the year.

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Traders in Fed-funds futures markets have adjusted their expectations accordingly. The latest data from the CME FedWatch tool indicates a 34.1% probability of three quarter-point rate cuts occurring before December. The likelihood of at least one rate cut by June stands at 64.5%.

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In economic data released Thursday, initial jobless claims in the U.S. rose slightly by 2,000, reaching 223,000 for the week ending March 15.

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Outside the U.S., the Bank of England opted to keep interest rates steady at 4.5%, as policymakers assess the evolving economic landscape.

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