After the interest rate cut, more cold water! Powell's "hawkish" statement triggered the largest single-day drop in U.S. bonds in nearly five months

According to the Zhitong Finance APP, as the Federal Reserve lowered interest rates as expected, U.S. Treasury bonds fell sharply, marking the largest single-day drop in nearly five months. Despite a weakening labor market prompting policymakers to lower the benchmark rate to 3.75%-4% on Wednesday, Chairman Jerome Powell's strong policy signals after the meeting impacted the $30 trillion U.S. Treasury market. He emphasized at the press conference that further rate cuts in December are "by no means a done deal," causing yields on U.S. Treasuries across all maturities to surge to their highest levels since early June.

Kelsey Berro, Executive Director of Fixed Income at JP Morgan Asset Management, pointed out that Powell is clearly resetting the market's expectations for the probability of a rate cut in December, making it a meeting with "real policy suspense." His remarks forced investors to reassess the future rate cut path, and although the market still believes the likelihood of a rate cut in December is relatively high, traders have significantly reduced their bets.

Powell emphasized that there are significant divisions within the committee, and no decision has yet been made regarding actions in December. Due to the federal government shutdown leading to the prolonged absence of key economic data, Powell's wording is viewed by the market as more instructive than usual. The yield on the two-year Treasury jumped 11 basis points to 3.6%, a one-month high, reflecting a clear repricing of the sensitive end of policy expectations. The implied rate cut magnitude for the federal funds rate path in September 2026 has also increased from 3% to 3.15%.

However, some institutions believe that the upward space for yields in this round is limited. Dan Carter from Fort Washington stated that the weakening job market has become the main basis for two consecutive rate cuts, and this logic is unlikely to undergo a fundamental reversal before the December meeting. U.S. Treasury yields had previously risen under signs of a slowing job market, but inflation remains above the 2% target range at around 3% annualized.

Priya Misra from JP Morgan Investment Management indicated that this decision represents "another risk management-type rate cut," aligning with market pricing. However, committee member Miran supports a one-time larger rate cut, while Kansas City Fed President Schmid advocates for a pause in rate cuts, highlighting a structural divide among committee members regarding labor risks and the assessment of the "neutral interest rate" level. Gregory Faranello from AmeriVet Securities noted that as Powell's term nears its end, concerns about other committee members expressing differing views have significantly diminished.

In another closely watched decision, the Federal Reserve announced that it will end its balance sheet reduction (QT) operations on December 1, after more than three years. Since the initiation in June 2022, over $2 trillion has been withdrawn from the system. Long-term yields followed suit, with the 30-year yield rising by 8 basis points.

Some strategy teams pointed out that the results of this meeting deviated from the market's original expectations, which anticipated a 25 basis point rate cut, a quicker end to QT, and no hawkish dissent. Now, with the release of "hawkish rate cut" signals, this may further drive continued selling pressure on U.S. Treasuries