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US Treasury yields whipsaw after Fed delivers interest rate cut

  • US Treasury yields eased following the Fed's decision to deliver its first rate cut in nine months.
  • The 10-year Treasury yield briefly dipped below 4.0% as investors pile into risk-on bets that lower rates will fix everything.
  • Yields whiplashed back into the high side after Fed Chair Powell warned that the SEP isn't a preset course.

US Treasury yields eased after the Federal Reserve (Fed) delivered its first interest rate cut since December of last year, prompting a broad-market dog-pile into risk assets, lowering Treasury yields as investors bank on lower interest rates supporting the US economy, specifically the lagging labor sector.

The Fed's Summary of Economic Projections (SEP) showed the majority of Fed policymakers expect to make two more rate cuts through the remainder of the year, falling in-line with rate market forecasts. However, Fed Chair Jerome Powell cautioned during his post-rate call press conference that the Fed is still tracking data from one release to the next, warning that the SEP is not a "preset course".

Fed Chair Powell noted that despite the appearance of odds of another 50 bps in rate cuts before the end of the year, the support for two more cuts isn't widespread throughout the Fed, limiting the potential dovishness of the Fed.

Read more Powell comments: No widespread support for 50 bps cut

US 10-year Treasury yields, via CNBC

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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Joshua Gibson

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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