Economic Data Reinforces Bets Against a Fed Rate Cut This Month

U.S. Treasuries came under renewed pressure after December’s labor market data surprised investors, prompting traders to sharply dial back expectations for a near-term interest rate cut from the Federal Reserve. While headline job growth came in softer than forecast, a larger-than-expected drop in the unemployment rate shifted the overall takeaway toward continued economic resilience.

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The mixed nature of the report initially created uncertainty, but markets quickly focused on the strength beneath the surface. A tighter labor market suggested the economy is still generating enough momentum to keep inflation risks alive, making it harder for policymakers to justify easing policy as soon as previously anticipated.

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As a result, U.S. government bonds sold off, sending yields higher across the curve. Treasury yields climbed by as much as three basis points on Friday, reflecting a reassessment of how soon the Federal Reserve might begin lowering borrowing costs. The move marked a notable shift from earlier in the week, when markets had been more confident that a rate cut could arrive as early as this month.

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Interest rate futures showed traders nearly eliminating bets on an imminent policy move. Instead, expectations have reset toward a more cautious and gradual path for monetary easing. Investors now appear convinced that the Fed will need additional evidence of cooling inflation and labor market slack before taking action.

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Despite the repricing, bond traders are still holding onto the view that rate cuts remain on the table over the longer term. Current market pricing continues to point to two reductions in interest rates during 2026, with the first cut expected around the middle of the year. That outlook underscores a belief that while the economy remains firm for now, slower growth and easing price pressures could eventually give the Fed room to act.

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The rise in yields was felt across short- and long-term maturities, indicating that investors are adjusting expectations not only for the timing of rate cuts but also for how restrictive policy will remain in the interim. Short-dated yields reflected the reduced probability of an immediate move, while longer-term yields edged higher as traders recalibrated their broader outlook for growth and inflation.

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The December employment data reinforced the idea that the labor market, while no longer overheating, remains far from weak. The drop in the unemployment rate suggested continued demand for workers, even as hiring cooled modestly. For policymakers, that balance complicates the picture, as easing too soon could risk reigniting inflationary pressures.

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Federal Reserve officials have repeatedly emphasized that decisions will remain data-dependent, and Friday’s report did little to simplify that calculus. While softer job gains could point toward moderation, a lower unemployment rate strengthens the case for patience. As a result, markets are increasingly aligning with the Fed’s message that policy will stay restrictive until there is greater confidence inflation is on a sustained path lower.

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The bond market reaction also highlighted how sensitive expectations have become to incremental data surprises. With valuations stretched and positioning crowded around rate-cut bets, even modest deviations from forecasts can trigger outsized moves in yields and futures pricing.

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Looking ahead, investors will be closely watching upcoming inflation readings, wage data, and consumer spending figures for confirmation that price pressures are easing without a sharp slowdown in growth. Any signs that inflation is stabilizing above the Fed’s target could further delay expectations for rate cuts, keeping upward pressure on yields.

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For now, the takeaway from Friday’s session is clear: hopes for an early policy pivot have faded, at least temporarily. While rate cuts remain part of the longer-term outlook, the path toward easing appears slower and more uncertain than markets had anticipated just weeks ago.

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As traders reassess the timing of monetary policy changes, volatility in Treasuries is likely to remain elevated. With economic data continuing to deliver mixed signals, investors may need to brace for further recalibration as markets search for clarity on when and how aggressively the Federal Reserve will eventually begin to ease interest rates.

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