Treasury Yields Decline as In-Line CPI Fuels Fed Bets

A softer inflation print paired with fresh evidence of cooling in the labor market sparked a rally in U.S. bonds, fueling expectations that the Federal Reserve will move ahead with an interest rate cut as soon as next week.

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Treasury yields fell across the curve, with the two-year yield slipping three basis points to 3.51%. In futures markets, traders are nearly fully pricing in three rate cuts by the end of 2025, beginning with a September move. U.S. equity futures gained modestly, while the dollar fluctuated against peers.

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Fresh government data showed that the core consumer price index, which strips out food and energy, rose 0.3% in August from the prior month, according to the Bureau of Labor Statistics. On a year-over-year basis, core prices increased 3.1%. At the same time, weekly jobless claims spiked to the highest level in nearly four years, adding to signals of a slowing job market.

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“Inflation looks relatively stable right now, which gives the Fed room to focus more squarely on labor market weakness,” said Skyler Weinand of Regan Capital. “Our expectation is a 25 basis-point cut next week, followed by two more similar moves before the year is out.”

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One of the key uncertainties for policymakers is how much companies will pass along higher costs from tariffs to consumers. Fed officials broadly anticipate that import duties will push inflation higher through late 2025. The open question is whether those effects will be short-lived or become more persistent.

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For now, the consensus among economists is that the Fed will lower rates at next week’s meeting in an effort to cushion a rapid slowdown in hiring. Fed Chair Jerome Powell hinted at this possibility in his Jackson Hole speech last month, and subsequent reports confirmed that the softening in job growth carried into August.

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Wall Street has responded by pricing in a more aggressive pace of easing. A growing number of forecasters now expect quarter-point cuts at each of the Fed’s three remaining meetings this year, a step up from earlier projections of just two cuts. Looking further ahead, markets are signaling expectations for at least five 25 basis-point cuts between now and September 2026.

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“With cash yields likely to drift lower as the Fed reopens the rate-cutting cycle, investors will face increasing pressure to put idle cash to work in higher-yielding opportunities,” said Ulrike Hoffmann-Burchardi of UBS Global Wealth Management. “Gradually building diversified portfolios can help manage timing risks, reduce emotional decision-making, and position investors to take advantage of market pullbacks and recoveries.”

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The prospect of easier Fed policy has bolstered a global bond rally this year, aligning with similar moves by other major central banks that have already trimmed borrowing costs.

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Still, longer-dated Treasuries have been slower to join the rally, as investors remain cautious about rising U.S. government debt levels. Just last week, the yield on 30-year Treasuries climbed to around 5%—the highest since July—before retreating on signs of weaker labor demand.

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Across the Atlantic, the European Central Bank opted to leave interest rates unchanged for a second consecutive meeting. Officials judged that inflationary pressures remain contained and that the eurozone economy is holding steady, even as higher U.S. tariffs weigh on global trade.

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Taken together, the latest developments underscore a turning point for monetary policy. With inflation cooling and employment showing cracks, the Fed appears prepared to shift gears toward rate cuts to support growth.

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For investors, this environment signals a renewed focus on bonds, diversified portfolios, and positioning for a lower-yield landscape ahead.

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