Powell Hints at September Rate Cuts: Treasury Rally and Market Reactions in 2025

• What Did Powell Actually Say About Rate Cuts?
• How Are Markets Pricing In Potential Rate Cuts?
• Why Are Short-Term Bonds Outperforming?
• What Economic Data Could Change the Equation?
• How Are Political Factors Influencing the Fed?
• Frequently Asked Questions

Federal Reserve Chair Jerome Powell's latest comments have sent shockwaves through financial markets, signaling potential interest rate cuts as early as next month. This development has triggered a significant rally in government bonds while creating a fascinating divergence between short and long-term yields. Market participants are now weighing the Fed's delicate balancing act between a softening labor market and persistent inflation risks, with all eyes on upcoming economic data that could make or break the September decision.

What Did Powell Actually Say About Rate Cuts?

In what markets interpreted as his clearest signal yet, Chair Powell suggested the eight-month pause in monetary easing might be coming to an end. "Labor-market risks may warrant adjusting our policy stance," he stated, using language that bond traders immediately recognized as dovish code. The comments came amid growing concerns about employment growth slowing more than expected, though Powell carefully avoided committing to any specific timeline.

The immediate market reaction was textbook - Treasury prices jumped across the curve, with the most pronounced moves in shorter maturities. What's particularly interesting is how the yield curve responded. The gap between 2-year and 10-year Treasury yields widened by the most in four years, reflecting traders' belief that short-term rates will fall faster than long-term ones as the Fed shifts to easier policy.

How Are Markets Pricing In Potential Rate Cuts?

Futures markets currently assign about an 80% probability to a quarter-point cut at the September FOMC meeting, according to data from TradingView. But here's where it gets fascinating - traders have essentially priced in two full cuts by year-end, with some even betting on a third. "This pricing is the appropriate reaction," noted John Briggs of Natixis, though he cautioned that "anything beyond two-and-a-half cuts before payrolls data WOULD be too aggressive."

The BTCC research team observes that this market positioning creates an asymmetric risk profile. If the Fed delivers exactly what's expected, the reaction might be muted. But any deviation - either more cuts or fewer - could trigger significant volatility. It's worth remembering that back in late 2024, longer yields actually climbed even as the Fed was cutting rates, a counterintuitive MOVE that today's traders would be wise to consider.

Why Are Short-Term Bonds Outperforming?

Friday's session told the story perfectly - while all Treasuries rallied, short-dated securities led the charge. The 2-year note yield plunged 10 basis points to 3.7%, approaching its early-August low. This reflects what Padhraic Garvey of ING calls "the front end having Chair Powell on its side." In plain terms, shorter maturities benefit most directly from anticipated Fed easing.

Meanwhile, longer bonds face the double whammy of inflation concerns and growing deficit worries. As Meghan Swiber of Bank of America points out, "If we have a Fed cutting while inflation remains sticky, we should see market expectations of future inflation rise." This dynamic helps explain why the spread between 5-year and 30-year yields just hit its widest since 2021.

What Economic Data Could Change the Equation?

Several key reports due before the September 17th decision could dramatically alter the calculus:

• The Fed's preferred inflation gauge (PCE data)
• Upcoming Treasury auctions of 2-, 5-, and 7-year notes
• The next employment situation report

Michael Arone of State Street reminds us, "There's a long way between now and September 17th." A single strong jobs number or hot inflation print could force markets to rapidly reprice expectations. Conversely, weak data might accelerate bets on more aggressive easing.

How Are Political Factors Influencing the Fed?

The elephant in the room remains political pressure on the central bank. Former President Trump's recent criticisms of Powell and threats against Governor Lisa Cook have raised eyebrows in financial circles. While Cook has vowed not to step down, these public attacks on Fed independence create additional uncertainty - the last thing markets need during a delicate policy transition.

Gregory Peters of PGIM Fixed Income sums it up well: "We're entering an environment of mixed data that will keep the bond market on edge." Whether this translates to a smooth policy pivot or a bumpy ride remains to be seen, but one thing's certain - all eyes will remain glued to both economic indicators and Fed communications in the coming weeks.

Frequently Asked Questions

What did Powell say about interest rate cuts?

Federal Reserve Chair Jerome Powell indicated that labor market risks may warrant adjusting monetary policy, signaling potential rate cuts as soon as September 2025. His comments caused a significant rally in Treasury markets.

How likely is a September rate cut?

As of August 2025, futures markets are pricing in approximately an 80% probability of a quarter-point rate cut at the September FOMC meeting, with traders expecting two full cuts by year-end.

Why are short-term bonds performing better than long-term bonds?

Short-term Treasuries benefit more directly from anticipated Fed easing, while longer-dated bonds face concerns about persistent inflation and growing budget deficits, causing the yield curve to steepen.

What economic data could change the Fed's decision?

Key reports including the PCE inflation gauge, employment data, and Treasury auction results could significantly influence whether the Fed cuts rates in September or maintains current policy.