Treasury Secretary Scott Bessent Says Bond Market Is Signaling Fed Should Cut Rates

Treasury Secretary Scott Bessent told Fox Business that the bond yield at the shorter end of the curve indicates the Federal Reserve should cut interest rates.

"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 told Fox Business.

The two-year yield was trending close to 3.67% on Thursday, compared to the effective federal funds rate of 4.33%. The central bank’s policy rate currently stands in the range of 4.25% to 4.50%.

Although Fed officials have repeatedly asserted they can afford to wait for incoming data before adjusting the policy rate, futures traders are convinced the central bank will reduce its policy rate by a cumulative 100 basis points in 2025.

According to the CME FedWatch Tool, traders have factored in that the Fed will maintain a status quo policy in May but expect the central bank to announce a 25-basis-point rate cut in June.

After that, the Fed is expected to make a 25-basis-point reduction in July, September, and December this year.

The calls for rate cuts come at a time when the first-quarter (Q1) GDP has contracted 0.3%, marking the first quarter of negative growth since Q1 2022.

The Bureau of Economic Analysis stated that the decrease in Q1 real GDP primarily reflected an increase in imports and a reduction in government spending. This was partly offset by increases in investment, consumer spending, and exports.

Meanwhile, former Treasury Secretary Janet Yellen reportedly stated that the Trump administration’s tariff policies will have far-reaching consequences on the U.S. economy, significantly raising the odds of a recession.

“[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 told the Financial Times.

Meanwhile, benchmark indices in the U.S. have recorded gains on Thursday following big tech earnings. The SPDR S&P 500 ETF Trust (SPY), which tracks the S&P 500, traded 1.02% higher in Thursday’s pre-market session, while the Invesco QQQ Trust, Series 1 (QQQ), which tracks the Nasdaq Composite, was up 1.65%.

The iShares 7-10 Year Treasury Bond ETF (IEF) traded 0.53% lower by Thursday afternoon.

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