US yields dip as Fed flags economic risks, signals patience on rate moves

NEW YORK – US Treasury yields slipped on Wednesday after the Federal Reserve held interest rates steady, as expected, but noted that the risk of higher inflation and unemployment has increased.

Fed Chair Jerome Powell, in a press conference after the US central bank’s latest policy meeting, emphasized the high degree of uncertainty brought on by the Trump administration’s tariffs. As a result, the Fed cannot be pre-emptive when it comes to monetary policy, he said, and has to wait and see how things play out on the tariff front.

“It’s not a situation where we can be pre-emptive because we actually don’t know what the right response to the data will be until we see more data,” Powell said.

The benchmark 10-year yield fell to 4.275%, down 4.3 basis points (bps). US 30-year yields also dropped, down 4 bps to 4.773%.

On the front end of the curve, the two-year yield, which reflects interest rate expectations, was down by less than a basis point at 3.781%.

The Fed’s policy-setting Federal Open Market Committee kept the central bank’s benchmark interest rate steady in the 4.25%-4.50% range, but pointed to economic uncertainty amid mounting risks of elevated inflation and joblessness.

“The Committee is attentive to the risks to both sides of its dual mandate,” the FOMC said in its statement.

Ali Hassan, a portfolio manager at Thornburg Investment Management, said given the ongoing turmoil, the Fed’s reaction function – when and how deeply it responds – has been up for debate.

“The consensus is that the Fed is unlikely to make such a move without more evidence. How much pain the economy must suffer for the Fed to waive off the inflation risk and pivot to supporting economic growth” is not clear at the moment,” Hassan said.

“The Fed has claimed to be data-dependent, but in such a fast-moving situation, we’ll want to understand what soft and leading data they are weighing most in calibrating policy,” said Hassan, who thinks the central bank should cut rates at its meeting next month.

ONUS ON LABOR MARKET

The US Treasury yield curve flattened following the release of the Fed statement, with yields on the long end lower than those on the front end, suggesting the Fed is unlikely to ease at the next meeting in June.

The spread between two-year and 10-year yields narrowed to 49.4 bps on Wednesday, compared with 51 bps late on Tuesday. Typically under a Fed easing cycle, the curve steepens, with short-dated Treasury yields tied to rate cuts.

The benchmark federal funds futures market is pricing in more than a 70% chance that the Fed will resume its rate cuts at its July 29-30 policy meeting, according to LSEG calculations. It also sees about 82 bps of easing this year.

“Recent better-than-feared jobs data has supported the Fed’s on-hold stance, and the onus is on the labor market to weaken sufficiently to bring a resumption of its easing cycle,” Ashish Shah, chief investment officer of public investing at Goldman Sachs Asset Management in New York, said in emailed comments.

“Any weakening in the labor market, however, could take a number of months to become apparent and we see the odds skewed towards another ‘hold’ at next month’s meeting.”

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Will Dunham, Deepa Babington, and Paul Simao)