U.S. Treasury Yields Plunge as Soft Inflation Sparks Fed Rate Cut Frenzy (August 2025)

• Why Did Treasury Yields Drop Suddenly?
• Are Tariffs Distorting the Inflation Picture?
• How Is the Fed Likely to Respond?
• What’s Next for Investors?

U.S. Treasury yields took a nosedive this week after July’s inflation data came in softer than expected, fueling bets that the Federal Reserve will slash interest rates as early as September. The 10-year yield dropped to 4.255%, while the 2-year yield fell to 3.711%. Analysts are divided on whether recent tariff hikes will derail the disinflation trend, but markets are already pricing in three rate cuts this year. Here’s why Wall Street is buzzing—and what it means for your portfolio.

Why Did Treasury Yields Drop Suddenly?

The latest Consumer Price Index (CPI) report showed inflation holding steady at 2.7% year-over-year in July, below Goldman Sachs and JPMorgan’s 2.8% forecast. Core CPI (excluding food and energy) rose 0.3% month-over-month, matching the long-run average but still enough to spook bond traders. "The Fed’s ‘higher for longer’ narrative is crumbling," said a BTCC analyst. "Markets now see a 98.1% chance of a September cut—that’s nearly a done deal."

Are Tariffs Distorting the Inflation Picture?

Core inflation surged to 3.1% annually in July—the fastest pace since February—with tariffs likely playing a role. Oxford Economics’ Michael Pearce predicts core CPI could peak at 3.8% by year-end as import costs trickle down. President TRUMP insists "consumers aren’t paying tariffs," but Moody’s Mark Zandi counters: "The rise in core goods inflation to 1.2%—the highest since 2022—is tariff-driven." Deutsche Bank notes tariff impacts remain volatile after August 7’s new levies, with more expected on pharmaceuticals and chips.

How Is the Fed Likely to Respond?

CME’s FedWatch Tool shows traders pricing in three 2025 rate cuts, with September at 98.1% odds. Richmond Fed’s Thomas Barkin admits the central bank is torn between fighting inflation and protecting jobs. Meanwhile, Trump blasted Jerome "Too Late" Powell, demanding immediate cuts. "The Fed’s Jackson Hole meeting later this month could be explosive," warns Wells Fargo’s Sarah House.

What’s Next for Investors?

With Treasury yields retreating, risk assets like crypto and stocks may benefit. "We’re seeing capital rotate out of bonds—Bitcoin could test $100K if the Fed pivots," notes a BTCC strategist. But caution remains: tariff uncertainties and sticky core inflation could still upend the soft-landing scenario. As always, diversify and hedge.