US Treasuries Take Sharpest Plunge In A Year Ahead Of Fed Meeting: Could Powell Adjust Stance In Response To Trump?

Longer-dated U.S. Treasury bonds, tracked by the popular iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), saw their steepest decline in over a year on Wednesday, plummeting more than 2.6%, as investors offloaded fixed-income assets amid rising expectations of wider budget deficits and higher inflation, spurred by Donald Trump‘s victory in the presidential election.

This bond sell-off comes one day before a pivotal Federal Reserve interest rate decision scheduled for 2 p.m. ET Thursday.

The Federal Reserve is broadly expected to cut interest rates by 25 basis points to a range of 4.5%–4.75%, a move fully priced in by market participants, according to the CME FedWatch Tool.

While the rate decision itself is almost certain, investors will be more focused on Fed Chair Jerome Powell's remarks, which may offer crucial insights into the Fed’s stance on the evolving inflation and fiscal policy.

Fed watchers are keen to highlight if a potential shift in fiscal policy under Trump could prompt the Fed to modify its approach.

Economists broadly agree that tariffs and tax cuts are likely to drive up inflation, potentially leading to a more hawkish response from the Federal Reserve. JPMorgan analysts estimate that universal tariffs, coupled with domestic tax cuts, could increase U.S. inflation by as much as 2.4%.

Goldman Sachs chief economist Jan Hatzius suggests that Trump's policies might keep core inflation above 3% by 2025, well above the Fed's 2% target. Hatzius highlighted that these factors “might delay cuts that would otherwise come more swiftly.”

Read also: Trump’s Historic Return: 7 Ways His Second Term Could Impact The US Economy

Fed Expected To Cut Rates In November, But All Eyes Are On What Comes Next

"We expect a 25-basis-point cut in November, with Powell likely to maintain an optimistic tone," said Bank of America rates analyst Mark Cabana. He explained that softer-than-expected jobs data for October, combined with downward payroll revisions, were key factors solidifying the case for this November rate cut.

Bank of America also indicated that these labor data trends increase the likelihood of another rate cut in December.

Goldman Sachs economist David Mericle highlighted that recent inflation data has eased concerns about inflation reaccelerating. “Better inflation news has alleviated fears of sticky inflation from earlier in the year,” he said. He also emphasized strong Q3 GDP growth as a sign of resilience in the U.S. economy, despite a cooling labor market.

Goldman Sachs now forecasts four additional cuts in the first half of next year, bringing rates down to 3.25%–3.5%.

Mericle acknowledged "uncertainty about both the pace and final rate" of future cuts, noting that the Fed’s path forward will depend heavily on evolving economic data.

Will Trump Pressure Powell on Interest Rates?

During Thursday’s Q&A, Powell will likely face questions on whether the Fed plans to act preemptively or reactively in response to changing fiscal dynamics.

Investors are eager to understand if the Fed will proactively address anticipated inflation or wait for economic data to reflect any significant change.

Powell, whose term expires in 2026, could also be questioned about the Fed's independence. In his previous term, Trump frequently pressured the Fed to lower rates and has hinted that, if re-elected, he would not renew Powell's term.

During Trump's first presidency, he issued over hundreds of tweets criticizing Fed policy, often urging for lower rates, according to data shared by the Brookings Institution.

How Could Markets React To November Fed Meeting?

Market data suggest a 70% probability of another 25-basis-point cut at the Fed's Dec. 18 meeting, down slightly from 77% the previous day.

If Powell delivers dovish remarks that reinforce expectations of a December rate cut, risk assets could rally. The S&P 500, represented by the SPDR S&P 500 ETF Trust (NYSE:SPY), might respond positively, while small-cap stocks, tracked by the iShares Russell 2000 ETF (NYSE:IWM), may extend gains following Wednesday's rally.

Conversely, if Powell signals hesitation about further rate cuts, particularly in December, and indicates a potential inclination toward addressing rising inflation expectations, investors could be disappointed, potentially putting downward pressure on the markets.

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