The Federal Reserve aggressively cuts interest rates, triggering a "inflation storm" in the U.S. bond market.

The Federal Reserve's 50 basis point rate cut has kicked off a new round of easing, but this aggressive move has reignited inflation concerns in the U.S. bond market. Some investors worry that the relaxed financial environment could reignite price pressures. Long-term U.S. Treasury bond yields, which are most sensitive to inflation prospects, have risen to their highest level since early September. Some investors fear that the Fed's shift from suppressing inflation to protecting the job market could lead to a rebound in price pressures. Cayla Seder, multi-asset strategist at Daofu Global Macro, said, I think that if we are in an environment of rate cuts and the Fed indicates it wants to provide support before the labor market weakens, there will be questions about how quickly inflation can reach the Fed's target. She expects that as the market bets on stronger economic growth and inflation, long-term Treasury yields will rise further. Last Wednesday, Fed Chairman Powell said the 50 basis point rate cut was a "realignment" of Fed policy aimed at moving inflation sustainably towards the Fed's 2% target while maintaining a strong job market. However, repeated emphasis by the Fed on economic resilience has heightened concerns about the slow and rocky path of rate cuts. Fed officials' rate forecasts also suggest that the pace of rate cuts may be slower than market expectations. After the Fed announced the rate cut last Wednesday, future ten-year inflation expectations measured by U.S. Treasury Inflation-Protected Securities (TIPS) rose. On Thursday, the 10-year break-even inflation rate rose to 2.16%, its highest level since early August. On Monday, the index briefly hit a new high of 2.167%. After the interest rate decision by the Fed was announced on Thursday, non-dealers bought 93.4% of the $17 billion in bonds sold, the highest level since January. However, according to data from LSEG, there was a net outflow of funds into U.S. dollar inflation-linked bonds in the week ending Monday. BMO Capital Markets rate strategist said in a report last week, "Investors are once again concerned about the specter of inflation." Matt Smith, fund manager at Ruffer, said that over the past few days and weeks, he has been adding inflation protection to his portfolio. Many market participants still recall vividly the sell-off triggered by the Fed's dovish turn in December last year, followed by unexpected rises in inflation and employment over the following months. Although interest rates are at their highest levels in over 20 years, the Goldman Sachs U.S. Financial Conditions Index, which measures credit availability in the economy, has fallen this year. The day after the Fed's decision, the index fell to its lowest level since May 2022. Brendan Murphy, head of North American fixed income at Insight Investment, said, "We believe inflation will remain relatively moderate... but the larger the Fed's rate cut, the more you need to question that." "Inflation outlook" Inflation measured by the U.S. Consumer Price Index (CPI) has sharply declined over the past two years. In August, it was 2.5%, far below the peak of over 9.1% in June 2022. Fed Governor Waller said last week that recent data has convinced him that the Fed needs to cut rates faster because the inflation rate may fall below the 2% target. However, for the same information, Fed Governor Bowman fears that a larger rate cut may be interpreted as declaring victory against inflation too soon. At last week's meeting, she opposed a 50 basis point rate cut, opting instead for a 25 basis point cut. If inflation continues to recede, despite the repricing of rate cut pace causing volatility, the outlook for bonds may still remain positive. However, some doubt whether the Fed's aggressive rate cut is premature, as the inflation rate is still above target and recent monthly data suggests price pressures remain sticky. Economists at Bank of America Securities mentioned the so-called "Fed Put" in a report last week - that is, the level of the S&P 500 index at which the Fed is forced to step in to support the market. They said that given the economic resilience and the stock market at historic highs, "Powell's Fed Put" may have come too early. "A more aggressive easing cycle could make it more difficult to reach the 2% target," they said.