Fed Holds Rates Hostage: No June or July Cuts as Economy Dodges Bailout Bullet

The Federal Reserve just slammed the door on rate-cut hopium—June and July are off the table. Why? Because apparently, the economy doesn’t need life support (or so they claim).

Powell & Co. are playing hardball with inflation, betting Main Street can tough it out a little longer. Meanwhile, Wall Street traders are left clutching their rate-cut bingo cards like expired lottery tickets.

Bonus finance jab: Nothing says ’confidence’ like central bankers refusing to rescue an economy they overstimulated into this mess.

Traders step back as yields jump and risk appetite grows

Traders who were betting on three rate cuts this year have backed off. Now the market is pricing in just two cuts for 2025, with swap contracts showing the Fed might only drop rates by 55 basis points, instead of the 75 they expected just last Friday. That adjustment alone rattled the bond market.

The two-year Treasury yield, which always reacts to moves from the Fed, jumped 12 basis points on Monday, pushing back above 4%. That spike came after investors realized the central bank isn’t going to act just because Wall Street wants it to. 

The drop in rate-cut bets also made US Treasuries less attractive. Stocks, on the other hand, went up. So the money started chasing risk again.

Since last week’s Fed meeting, where they decided to do nothing, yields have gone up fast. The two-year yield climbed more than 40 basis points, from 3.55% to over 4%. The five-year yield also moved, going from 3.85% to 4.11%. That’s a clear message from the bond market: no more easy money, at least for now.

Jerome Powell, the Fed Chair, told reporters that the central bank is watching how new trade policies affect inflation and growth before doing anything. He made it clear there’s nothing in the data that shows the economy is falling apart.

Powell ignores Trump’s pressure, stays focused on inflation

Even with the market cooling off, president Donald Trump wants action. Just yesterday, the president posted on Truth Social, calling for lower rates. But as usual, he is living in his own unique set of data. Trump said:

“No Inflation, and Prices of Gasoline, Energy, Groceries, and practically everything else, are DOWN!!! THE FED must lower the RATE, like Europe and China have done. What is wrong with Too Late Powell? Not fair to America, which is ready to blossom? Just let it all happen, it will be a beautiful thing!”

Admittedly, there was a drop in prices for some things, like food and energy, which have been sliding due to higher oil production and weaker global growth. April prices in those areas fell compared to March. But overall inflation, even though it’s way down from its peak, is still higher than the Fed’s 2% target. That’s why they’re not rushing.

Jake Dollarhide, CEO of Longbow Asset Management, said, “There’s been a fear that tariffs are going to push inflation higher, and they may still, but today’s data at least gives investors a sense of relief that inflation is still moving in the right direction.”

But Raymond James economists aren’t convinced it’s time to cut. They wrote that ongoing uncertainty around tariff policies and how they’ll affect inflation is enough to keep the Fed from making any moves.

The risk is simple: cut too early, and inflation might come back even stronger. Fed officials believe lowering rates before inflation is under control is a dangerous move. It could lead to even more price increases, and that WOULD drag down real economic growth.

Gregory Daco, chief economist at EY, said their team had to change their own forecast. “With little clarity on the final status quo for trade policy and Fed policymakers unlikely to preempt any growth or inflation developments, we now only anticipate two Fed rate cuts (instead of three), and believe the first rate cut will come in September (instead of July),” he said.