10-year Treasury yield falls below 4% as Powell says Fed likely to cut this year

The 10-year U.S. Treasury yield declined below 4% on Wednesday for the first time in roughly two weeks as the Federal Reserve Chair Jerome Powell said the central bank would likely cut rates this year.

The 10-year Treasury yield fell about 10 basis points to 3.96%. The yield on the 2-year Treasury was last down about 14 basis points at 4.22%.

Yields and prices move in opposite directions and one basis point is equivalent to 0.01%.

“We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said on Wednesday afternoon.

Bond yields moved slightly higher after the Federal Reserve released its updated policy statement on Wednesday afternoon, but the 10-year did not jump back above the 4% level. While the central bank held its benchmark interest rate steady, as expected, the Fed made a few key tweaks to its statement language.

Notably, the Fed added language that said it wasn’t ready to cut rates just yet.

“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the statement said.

However, the Fed also removed a part of the statement about monitoring certain economic and financial conditions for potential “additional policy firming.” Traders could interpret that change as an admission from the central bank that it is more likely to cut rates than hike them going forward.

Traders will be weighing the changes in the statement and comments from Fed Chair Jerome Powell to determine whether the central bank is leaning toward rate cuts at its March or May meetings, or even further in the future.

“The statement is very benign in our view – the Fed has been shifting its rhetoric in a dovish direction since the summer, something that will continue amid ongoing disinflation and cooler labor conditions. We continue to think the ‘sustainability’ threshold has been achieved, which is why a cut in Mar remains more likely than not,” said Adam Crisafulli of Vital Knowledge.

This Fed update comes as recent economic data, including the personal consumption expenditures price index, the Fed’s favored inflation gauge, have suggested that pressures from higher prices are easing.

ADP data Wednesday showed private payroll growth decelerated to 107,000 in January, while economists polled by Dow Jones forecast 150,000. The slowdown in the first month of 2024 was also below the downwardly revised 158,000 in December.

Ahead of Wednesday’s update from the Fed, traders were pricing in a roughly 45% chance of a rate cut being announced at the next central bank meeting in March, CME Group’s FedWatch tool showed, based on prices for interest rate futures contracts.