Treasury securities exhibited indecisiveness for most of Wednesday's trading session, only to experience a significant decline in the final hour. Initially, bond prices hovered near stability but later plummeted sharply, causing the yield on the benchmark ten-year note—which inversely correlates with its price—to soar by 10.9 basis points to 4.494 percent. This mark represented the highest closing level since late May, effectively erasing the modest decreases observed over the previous two sessions.
The late-session sell-off was triggered when the Federal Reserve announced its anticipated decision to reduce interest rates by a quarter point, yet it also indicated fewer future rate cuts than previously projected. The Fed set the new federal funds rate target range at 4.25 to 4.50 percent, aligning with the rate cut from early November.
Moreover, the central bank described the current economic outlook as "uncertain," balancing risks on both sides of its dual mandate. Given that the rate reduction was largely expected, attention shifted to the Fed officials' latest economic forecasts, predicting fewer rate cuts in the coming year than earlier anticipated.
The most recent forecasts suggest interest rates will stand between 3.75 to 4.0 percent by the end of 2025, as opposed to the previously estimated 3.25 to 3.50 percent range in September. Assuming a quarter-point rate reduction by the Fed, projections now point to only two rate cuts next year, instead of the four initially forecasted.
This revised outlook stems from Fed officials' expectations of higher-than-anticipated inflation in 2025, with consumer price growth projected at 2.5 percent compared to the September forecast of 2.1 percent. During a post-meeting press conference, Fed Chair Jerome Powell emphasized the need for further progress on inflation before additional rate cuts could be considered, noting recent stagnation in annual price growth.
Interestingly, the decision to lower rates was not unanimous; Cleveland Fed President Beth M. Hammack preferred maintaining the current rate level. The Fed's subsequent monetary policy meeting is set for January 28-29, with CME Group's FedWatch Tool presently indicating a 90.3 percent likelihood of rates remaining unchanged.
Thursday's trading may continue to reflect reactions to the Fed's announcement, while market participants will also be watching for reports on weekly jobless claims and existing home sales.
