The Federal Reserve's interest rate cut failed to stop the sell-off in the bond market, with key yields spiking to highlight policy divisions.

Noticeably, Federal Reserve Chairman Powell refuted the bets of bond traders - these traders are expecting the Federal Reserve to prevent the stagnation of the US economy through a series of aggressive interest rate cuts. Although the Federal Reserve lowered the benchmark interest rate by 25 basis points as widely expected, with two more such cuts expected later this year, the Federal Reserve Chairman indicated that he has not abandoned caution and remains vigilant of inflation risks. Policymakers also did not succumb to pressure from US President Trump for larger interest rate cuts, with the only dissent coming from a White House advisor recently appointed to the Federal Reserve Board. Bond traders believe that this stance indicates that even though the job market is faltering, the path of monetary policy is far from certain. Therefore, the brief uptrend in government bonds that followed the Federal Reserve's initial decision gradually faded, pushing the 10-year yield up by 6 basis points to 4.09% at the end of the US trading session. "The expected deep rate cuts by the market are not yet set in stone," said Tracy Chen, portfolio manager at Brandywine Global Investment Management. "This 25 basis point cut is an insurance cut, a risk-management cut." Since Powell hinted last month that he was ready to cut rates again after keeping policy unchanged throughout the year, the bond market has been strong. Some traders have even started betting on a half-point rate cut by the Federal Reserve before the end of the year. This has raised high expectations for this meeting, while also posing the risk of a pullback in the bond market - since the end of the epidemic, the bond market has been caught off guard several times by the actions of the Federal Reserve. Some speculate that Trump's pressure may lead some to push for larger rate cuts, potentially causing division within the Federal Reserve Board. Powell made it clear that he is prepared to ease policy to prevent labor market deterioration, stating that he no longer considers the labor market "very strong." However, he emphasized that the Federal Reserve is far from shifting to firefighting mode and needs to ensure that Trump's tariffs do not reignite inflation, with policymakers still in a "meeting-by-meeting decision scenario. These comments pushed the two-year Treasury yield (the most sensitive period to changes in Federal Reserve policy) up by 5 basis points to 3.55%, with similar increases in other periods. The dollar rose along with the yields. The Federal Reserve lowered its policy rate to a range of 4% to 4.25%, with the impact of its quarterly updated forecasts outweighing this measure. According to the median forecast, the new dot plot indicates two more rate cuts this year and one in 2026. In comparison, the June median forecast showed two rate cuts this year, one in 2026, and another in 2027. "This is not hawkish, but more hawkish compared to market expectations," said Brett Barr, Co-Head of Global Rates at TCW Group. "The Federal Reserve has not truly acknowledged market pricing. The key is that Powell still describes this rate cut as a risk-management cut. They did not hint at a series of rate cuts in the future."