Treasury Secretary Scott Bessent says bond yields are flashing a clear signal to the Federal Reserve: it’s time to begin easing.
In an interview with Fox Business, Bessent pointed to short-term yields as evidence that the market believes the Fed is too restrictive. “We are seeing that two-year rates are now below fed funds rates, so that's a market signal that they think the Fed should be cutting,” Bessent said.
As of Thursday, the two-year Treasury yield hovered near 3.67%, well below the effective federal funds rate of 4.33%. The Fed’s target range remains between 4.25% and 4.50%.
Despite repeated indications from policymakers that they’re in no rush to ease, the bond market is pricing in aggressive action. Futures contracts suggest that traders expect four rate cuts totaling 100 basis points over the course of 2025, beginning as early as June.
Data from the CME FedWatch Tool shows the market assigning a high probability to the Fed holding steady in May but implementing a 25-basis-point cut in June. Additional cuts of 25 basis points are anticipated for July, September, and December.
The shift in expectations comes on the heels of a surprising contraction in Q1 GDP. The U.S. economy shrank by 0.3% in the first quarter, the first negative print since early 2022.
According to the Bureau of Economic Analysis, the downturn was largely driven by a surge in imports—many linked to anticipated tariff increases—and a decline in government spending. These drags were partially offset by gains in private investment, consumer outlays, and exports.
The economic softening has reignited policy debate, particularly as former Treasury Secretary Janet Yellen raised concerns about the long-term impact of the Trump administration’s tariff agenda. In remarks to the Financial Times, Yellen warned that escalating trade barriers could significantly damage the U.S. economy.
“[The tariff strategy] will have tremendously adverse consequences for the United States, for consumers, for the competitiveness of firms that rely on imported inputs,” Yellen said.
Wealth managers and advisors are increasingly focused on policy risk, especially in light of the Fed’s tightening cycle, trade uncertainty, and slowing growth. The Treasury curve’s inversion—long regarded as a recession predictor—is adding urgency to the discussion.
Meanwhile, equity markets rebounded sharply on Thursday after strong tech earnings helped buoy investor sentiment. The SPDR S&P 500 ETF Trust (SPY) climbed 1.02% in pre-market trading, while the Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100, gained 1.65%.
Despite those gains, the fixed income market remains under pressure. The iShares 7-10 Year Treasury Bond ETF (IEF) fell 0.53% by Thursday afternoon, underscoring investor uncertainty around the Fed’s path and the broader economic outlook.
Advisors may want to closely monitor the interplay between rate expectations, bond yields, and political developments as they consider asset allocation strategies for the second half of the year. The Fed’s upcoming meetings, coupled with evolving trade policy, will likely be pivotal in shaping market performance and client outcomes through 2025.
