• “The Fed can very well be on hold for a long time,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. Looking at the 10-year Treasury yield at around 4.5%, “we don’t see a great risk/reward when looking at growth and inflation.”

The Treasury market pared a rally that sent most yields to monthly lows after US economic data bolstered the Federal Reserve’s stance that there’s no urgency to cut interest rates further. Yields were lower by less than two basis points in late US trading Thursday after paring steeper declines. The 10-year note’s fell more than four basis points to 4.48%, the lowest level since Dec. 18, and rebounded to around 4.51%. US economic data Thursday showed that while the world’s biggest economy grew at a slower pace in the final quarter of the year, its consumer spending component exceeded economist estimates. Weekly jobless claims data released at the same time unexpectedly declined, a sign of labor market strength. Fed officials on Wednesday left interest rates unchanged as
expected — after cutting them at each of their three previous meetings since September — and indicated that stalled progress
toward lower inflation warranted a patient approach.

Economists at Morgan Stanley — the only major bank still predicting the Fed will cut rates at the next opportunity in
March — conceded that the bar has risen. “I don’t think inflation data will make enough progress to allow the Fed to cut in March,” said Chris Diaz, global fixed income portfolio manager at Brown Advisory.

Meanwhile, the European Central Bank cut rates by 25 basis points Thursday. The bloc is facing far bigger headwinds to growth, and policymakers including President Christine Lagarde have expressed confidence in inflation returning to target. Euro-area bonds rallied Thursday on data showing the bloc’s top two economies contracted at the end of last year and the region unexpectedly stagnated as the collapse of France and Germany’s governments bruised confidence among businesses and consumers.

The gains mounted as traders ramped up wagers on additional ECB rate cuts from this year. Germany’s two-year yield fell as
much as 10 basis points to 2.18%, its biggest drop since Nov. 22. Money markets came to close to fully pricing three more quarter-point reductions by the ECB this year, after Thursday’s widely expected cut, which took the deposit rate to 2.75%.

March Cut

In the US, money markets pared bets on further interest rate cuts after Wednesday’s decision, pricing in just a 13%
chance the Fed will move in March, down from almost 25% beforehand. A quarter-point cut is fully priced in by July, with a second but by year-end given about 67% odds. “The Fed can very well be on hold for a long time,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. Looking at the 10-year Treasury yield at around 4.5%, “we don’t see a great risk/reward when looking at growth and inflation.”

The Federal Open Market Committee voted unanimously to keep the federal funds rate in a range of 4.25%-4.5%, after lowering rates by a full percentage point in the final months of 2024. Treasuries briefly dropped after the Fed statement appeared to indicate increased concern about inflation, but Chair Jerome Powell downplayed the change, saying he expects consumer-price increases to continue to moderate. Yields came back down, ending Wednesday virtually unchanged.

“A rate cut at the March meeting would likely require incoming inflation and labor market reports to be softer than Fed officials are expecting,” Allison Boxer, an economist at Pacific Investment Management Co., wrote in a note. “Barring those surprises, rates are likely to remain on hold for now.”

The Fed aims for inflation as measured by the price index for personal consumption expenditures to average 2% over time, a rate it has exceeded since March 2021. The gauge rose 2.4% in November, down from a peak of over 7% in 2022. December data to be released Friday is expected to show acceleration to 2.6%, and an unchanged core rate of 2.8%.

The Fed’s latest decision came just over a week after President Donal Trump took office and threatened tariffs on some
of America’s main trading partners. Powell said the central bank is “very much in the mode of waiting to see what policies are enacted” from the new administration, before assessing their implications for the economy. The decision “confirms our general view that this is not a cycle, it’s not about recession risk – it’s about a recalibration of rates and who knows what’s going to happen next,” said Jean Boivin, head of the BlackRock Investment Institute, in a Bloomberg TV interview. “Both the market and the Fed have caught up with the reality this is a different environment and it’s going to require higher rates for longer,” he added.