- By Todd Stankiewicz, CMT, CFP, ChFC with SYKON Capital The Fed Takes Center Stage This week all eyes are on the Federal Reserve
- On Wednesday, the Fed is widely expected […]
By Todd Stankiewicz, CMT, CFP, ChFC with SYKON Capital
The Fed Takes Center Stage
This week all eyes are on the Federal Reserve. On Wednesday, the Fed is widely expected to announce its first rate cut in nine months, likely a 25 basis point reduction. While a larger 50 basis point cut is possible, that’s not the base case. Futures markets are pricing in a 96% probability of a 25 basis point cut, bringing the federal funds target range down from 4.25–4.50% to 4.00–4.25%.
Looking ahead, markets now expect three total cuts in 2025. One each in September, October, and December. The risk for investors is if the Fed doesn’t follow that path. A more hawkish tone or slower pace of easing could disappoint markets. Much of the recent rally has been fueled by expectations of easier policy, so any deviation could spark volatility.
Why Yields Could Rise After a Cut
It may sound counterintuitive, but a Fed rate cut doesn’t guarantee lower borrowing costs. In fact, the opposite can happen. Back in September 2024, when the Fed cut rates for the first time in that cycle, the 10-year Treasury yield actually moved higher afterward. Mortgage rates, which are tied to the 10-year, followed suit. Many borrowers waiting for relief instead saw costs rise.
We may face a similar setup now. Inflation has not continued to trend lower since last year’s cut. Both headline CPI and core CPI have ticked higher from their recent lows. If the Fed cuts too early, it could stoke inflation pressures, pushing yields higher. In 2024, the 10-year yield bottomed just before the Fed’s move, and then climbed sharply. It’s a reminder that “rate cut” doesn’t always equal “lower rates” for consumers.
A Warning From the UK
For a live example, look across the Atlantic. The Bank of England has been cutting rates, but the 10-year gilt, the UK equivalent of the Treasury, has been moving higher. At the same time, UK inflation has picked back up from its recent lows, leaving policymakers stuck between slowing growth and persistent price pressures.
That dynamic looks familiar. Lending rates in the UK, tied to the gilt, haven’t eased, they’ve climbed. At the same time, savers are earning less on short-term deposits because policy rates are lower. The result: households face higher borrowing costs while earning less on savings.
The lesson applies here too. Don’t assume a Fed rate cut will automatically make life cheaper. Lending rates are driven by longer-term yields, not the Fed’s overnight rate. Cuts can relieve market stress, but they can also reignite inflationary fears and push borrowing costs higher.
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