Soft Inflation Backs Two Federal Reserve Rate Cuts in 2025, Boosting U.S Bonds

U.S. Treasury yields fell on Tuesday after new inflation data for April came in lower than expected, boosting investor confidence that the Federal Reserve may be able to cut interest rates at least twice before the end of the year.

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This latest inflation report provided relief to the bond market, with the yield on the two-year Treasury note — which is particularly sensitive to Fed policy moves — dropping as much as six basis points to 3.95%. Meanwhile, the benchmark 10-year Treasury yield declined about three basis points, settling near 4.44%.

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Interest-rate swaps traders, who had recently reduced their expectations for rate cuts following easing tensions between the U.S. and China, recalibrated their forecasts in light of the weaker inflation numbers. They now anticipate around 55 basis points of Fed easing in total this year, which suggests at least two rate cuts, with the first one fully priced in for September.

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Ian Pollick, head of fixed income, commodities, and currency strategy at CIBC, said the April inflation data pointed to notable progress from the Fed’s perspective. However, he warned that the potential inflationary effects of tariffs imposed by the Trump administration may take longer to materialize compared to the previous round during Trump’s first term. As a result, he noted that concerns remain in the bond market about the stability of core goods prices over the next couple of economic reports.

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April’s consumer price data showed a slower pace of inflation than forecasted, which has been welcomed by markets. Although economists expect tariffs to eventually push inflation higher, many businesses may still be trying to clear out large inventories accumulated during previous periods of supply chain stress.

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As long as they continue to work through this stockpile, there may be little urgency to raise prices — which could help keep inflation pressures muted in the short term.

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Despite the better-than-expected data, Wall Street economists remain cautious and have adjusted their expectations for when the Fed might begin easing interest rates. Many are now pushing back their forecasts, with some scaling down the number of rate cuts they see for this year.

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Goldman Sachs economists, for example, have revised their projection, now calling for three quarter-point rate cuts starting in December rather than July. This marks a significant shift in timing, suggesting that while rate cuts remain a possibility, they are more likely to come later in the year.

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Similarly, Citigroup has postponed its forecast for the Fed’s next move, now predicting a rate cut in July instead of June. Barclays took an even more conservative stance, expecting just one rate cut in 2025 — a delay that indicates growing skepticism over how quickly the Fed will act.

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JPMorgan Chase economists also updated their projections, stating in a report published just before Tuesday’s inflation data that they now anticipate the Fed’s next rate cut in December instead of the previously expected September. This shift reflects a growing belief that the central bank will need more confirmation of sustained improvement in inflation trends before making a move.

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Overall, the bond market reacted positively to the April inflation report, as it provided signs that inflation is moderating — a necessary condition for the Fed to begin lowering interest rates. However, the outlook remains uncertain, with economists emphasizing that further evidence of cooling inflation will be needed before the central bank feels confident enough to begin easing monetary policy.

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Investors and policymakers alike will now be closely watching the next couple of inflation releases and other economic indicators to assess whether the disinflationary trend continues. At the same time, the evolving impact of tariffs and global trade developments could still introduce volatility and influence how soon the Fed decides to pivot.

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While the April data marked a step in the right direction for those hoping for rate cuts, the path forward remains complex and highly data-dependent.

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