Treasury Secretary Scott Bessent said on Thursday that the bond market is telling the Fed to get moving on rate cuts, ahead of his weekly meeting with Chairman Jerome Powell.
Speaking on Fox Business Network on Thursday, Scott pointed out that 2-year Treasury yields have dropped below the federal funds rate, something that usually means traders expect the central bank to cut rates soon.
“We are seeing that two-year rates are now below fed funds rates, so that’s a market signal that they think the Fed should be cutting,” Scott said.
As of press time, the 2-year note yield was down to 3.7%, falling about five basis points that day. That’s now nearly 0.7% lower than the Fed’s current effective rate of 4.33%, according to data from CNBC.
Right now, the official Fed range sits between 4.25% and 4.50%, unchanged since it cut rates by a full percentage point late last year.
Scott, who serves as the U.S. Treasury Secretary, said these numbers matter because he speaks with Fed Chair Jerome Powell every week. And this yield drop is going to be right at the center of their next meeting. He said the bond market is sending “a pretty direct message.”
Traders expect full percentage point cut while Fed stalls
The gap between the Fed’s policy rate and the 2-year Treasury yield has been growing for two months straight. That widening gap reflects how investors are betting on where monetary policy is headed.
CME’s data shows that people in the fixed-income space have started betting on a full 1% cut before the end of the year. That’s double what the Fed’s own forecasts show right now.
Scott claimed that his focus, and the focus of the Trump administration, is changing toward 10-year Treasury notes. Those affect consumer borrowing the most—mortgages, auto loans, and business credit.
On Friday morning, the 10-year yield had dropped to 4.148%, down more than two basis points. The 2-year yield was also down more than one basis point, sitting at 3.607%.
Since the Friday before Trump’s January inauguration, the 10-year yield has fallen by 0.5%. However, volatility has been extreme lately, and Scott said that’s because of the White House’s unpredictable rollout of tariffs.
While Scott looks at rates, investors are tracking what the Fed will actually do at its May 6-7 meeting. Right now, the CME FedWatch tool shows a 95% chance the Fed keeps rates steady next week. But beyond that? Markets are still expecting four rate cuts by the end of 2025. There’s a clear gap between what officials are saying and what investors are expecting.
That pressure gets more intense when you bring inflation into the picture. On Wednesday, the personal consumption expenditures (PCE) price index (the Fed’s preferred inflation gauge) showed a 3.6% jump for the quarter.
That’s way up from the 2.4% posted last quarter. Even core PCE, which strips out food and energy, rose 3.5%. It’s not the kind of inflation print that makes rate cuts easy to justify.
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