Steady Treasury Yields Ahead of Fed Decision That May Bring Fewer 2025 Rate Cuts

Yields on U.S. government bonds showed mixed movements early Wednesday as investors awaited the Federal Reserve’s final policy decision for the year. The central bank is widely expected to deliver a quarter-point rate cut while signaling fewer rate reductions for 2025 than previously anticipated.

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Treasury Yields Update

• The 2-year Treasury note yield declined by 2.2 basis points, settling at 4.217%, down from 4.239% on Tuesday.
• The 10-year Treasury note yield remained relatively stable at 4.387%, compared to 4.384% the previous day.
• The 30-year Treasury bond yield increased by 1.5 basis points, reaching 4.593%, up from 4.578% on Tuesday.

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Factors Influencing Markets

Investors are preparing for the possibility that the Federal Reserve may revise its projections for 2025, potentially reducing the number of anticipated quarter-point rate cuts. Back in September, the Fed had forecast four such reductions for 2025. However, market participants are now bracing for a more conservative outlook.

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The widely expected 25-basis-point rate cut on Wednesday is considered a near-certainty. Analysts are focusing on what the Fed's updated projections might reveal about its future monetary policy approach, particularly in light of recent inflation trends and economic data.

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Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, emphasized the potential for market turbulence as investors digest the Fed’s revised stance. “We believe investors should anticipate a deceleration in the pace of rate cuts in 2025 and near-term volatility as markets recalibrate the Fed’s standpoint,” Marcelli said.

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Market attention will turn to Federal Reserve Chair Jerome Powell’s press conference in the afternoon, where he is expected to provide insights into the central bank's outlook for 2024 and beyond. Powell will likely face questions regarding the pace of future rate cuts and the Fed’s ongoing efforts to bring inflation down to its 2% target.

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Recent economic data has painted a mixed picture of the Fed’s progress. While inflation has moderated from its peak, the path to achieving the Fed's 2% goal remains uneven. Powell’s comments will be closely scrutinized for any hints about how policymakers plan to navigate the challenges ahead.

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Adding to the day’s developments, new data on U.S. housing starts showed a decline in November, reflecting continued headwinds in the real estate sector. Housing starts came in at a seasonally adjusted annual rate of nearly 1.29 million units, falling short of economists’ median estimate. This marks a slight drop from October’s revised figure of 1.31 million units.

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The housing market has been under pressure due to higher mortgage rates and affordability concerns, which have dampened demand for new construction. These challenges are likely to persist into 2024, potentially influencing the broader economic outlook.

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The combination of mixed Treasury yield movements, revised Federal Reserve projections, and softer housing market data underscores the complex environment facing investors. While the anticipated rate cut aligns with market expectations, any surprises in the Fed’s updated outlook could trigger significant shifts in bond and equity markets.

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Investors will be watching closely to gauge the Fed's confidence in its inflation-fighting strategy and its assessment of broader economic conditions. With uncertainty lingering over the pace of future rate adjustments, markets are likely to remain volatile in the short term.

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In summary, Wednesday’s developments could provide critical insights into the Federal Reserve’s evolving approach to monetary policy. As Powell addresses the challenges ahead, his comments are expected to shape market expectations for 2024 and beyond.

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