Expectations for interest rate cuts plummeted, but U.S. bond yields fell instead of rising! The Federal Reserve's "secret" bond purchase plan surfaced

Federal Reserve Governor Christopher Waller made it clear on Monday that he supported the central bank to cut interest rates again at its December meeting.Federal Reserve Vice Chairman Philip Jefferson said at an event at the Kansas City Fed on the 17th local time that the balance of risks between the two goals of price stability and full employment highlights the need to "act cautiously when approaching neutral interest rates."
In addition to describing the recent views of the Federal Reserve, this article focuses on analyzing the possible reasons behind the Federal Reserve's hesitant interest rate cuts from a trading perspective.
Waller supports December interest rate cuts: Focus on the risk of labor market weakness
Waller pointed out that he was increasingly worried about the weakening of the labor market and the sharp slowdown in recruitment activity. This position made him firmly in the camp of supporting loose monetary policy against the backdrop of deepening divisions within the Federal Reserve-its core appeal is to cut interest rates to prevent further risks in the job market.
Waller further elaborated on his views in a prepared speech to economists in London: "I am not worried about accelerating inflation or sharply higher inflation expectations. My focus is entirely on the labor market.
After months of continued weakness, the September non-farm payrolls report later this week, and any other data in the coming weeks, are unlikely to change my judgment that another rate cut is necessary."
Although Waller has repeatedly spoken out in support of interest rate cuts in recent months, this time he updated his remarks to echo recent economic developments.
Due to the lack of official economic data due to the previous federal government shutdown, he cited a number of private and some public sector data to point out that the current labor market demand is weak and consumers are facing considerable pressure; at the same time, price data shows that the impact of tariffs on inflation will not last long.
Waller emphasized that another rate cut was essentially a "risk management" move-a statement consistent with Federal Reserve Chairman Jerome Powell.
He further explained: "I am worried that restrictive monetary policy is putting pressure on the economy, especially on low-and middle-income consumers.
Interest rate cuts in December will provide additional protection against accelerating labor market weakness, while pushing policies closer to a more neutral level." Waller also refuted the idea that the Fed was "blindly formulating policies" due to missing data, saying that "even without official comprehensive data, the existing various data, although imperfect, are enough to allow us to form a clear and action-guided judgment on the U.S. economy."
The cautious faction of the Vice Chairman of the Federal Reserve continues to speak out: Emphasizing that interest rate cuts need to balance risks
Just as Waller called for interest rates, another voice emphasizing "prudent interest rate cuts" continued to ferment.
Federal Reserve Vice Chairman Philip Jefferson said at an event at the Kansas City Fed on the 17th local time that the balance of risks between the two goals of price stability and full employment highlights the need to "act cautiously when approaching neutral interest rates."
He acknowledged that the current labor market was "slightly weak" but also noted that due to the suspension of key economic indicators due to the previous 43-day federal government shutdown,"it remains uncertain how much complete official data will be available before the meeting."
In fact, this is not the first time Fed officials have signaled caution. Last week, St. Louis Fed President Alberto Musalem expressed similar views; Boston Fed President Susan Collins also made it clear that the "threshold is high" for further easing.
The core concern of these officials is that inflation remains a persistent threat in the current economy, and additional easing measures may push up inflation levels again, thereby disrupting economic stability.
Internal differences intensify: it is difficult to reach consensus on the scope and pace of interest rate cuts
The next meeting of the Federal Open Market Committee (FOMC), which sets interest rates, will be held on December 9 - 10. Prior to this, the Federal Reserve had cut interest rates by 25 basis points twice in a row at its September and October meetings. Not only are there obvious differences in the market as to whether it will continue to cut interest rates at this meeting, but there is no consensus within the Federal Reserve.
It is worth noting that even among the camps that support interest rate cuts, there are differences in the extent of interest rate cuts: Waller clearly supports another 25 basis point rate cut, while Stephen Milan, also appointed by former President Donald Trump, advocated a larger 50 basis point rate cut in the previous two meetings.The Wall Street Journal bluntly stated that the differences within the Federal Reserve on interest rate cuts are already very serious, and the central bank is facing difficult decisions to determine the appropriate interest rate level.
Market expectations plummet: the probability of a rate cut fell from 90% to 44%
The divergent statements of Federal Reserve officials have had a significant impact on market sentiment, and the stock market has recently fallen. Looking back at September, the Federal Reserve's dot chart suggested that interest rates might be cut once in October and December, but market expectations for interest rate cuts in December have continued to cool down.
The U.S. interest rate forecasting model CME Fed WatchTool shows that the market's expectation of a rate cut in December at the end of last month is still as high as 90%. It dropped to 60% last week and is currently hovering around 45%. As the voices of caution continue to ferment, investors are gradually adjusting their expectations and are increasingly inclined to believe that the Federal Reserve may keep interest rates unchanged in December.
From a trading perspective, the recent 10-year yield on Japanese government bonds hit an 18-year high of 1.762. In addition to market demand for safe-haven, it may be due to the Bank of Japan.
In paving the way for bond purchases, since Japan has clearly increased fiscal investment, it means that the government will issue more bonds. As the main buyer of Japanese bonds, the Bank of Japan is more cost-effective to purchase bonds when bond yields are high.
At the same time, the Fed's hawkish remarks also lowered the Fed's expectation of interest rate cuts, causing U.S. bond yields to rise. The Fed also did the same. Controlling interest rate cuts expectations will help U.S. bond yields stay in a higher range. The Fed will have a greater demand for purchase after exiting QT. Bond demand, so there is an incentive to control U.S. bond yields at a higher level.
At the same time, the recent tightening of liquidity in the United States has become more and more serious. The Federal Reserve needs to purchase treasury bonds to release liquidity while controlling the cost of buying bonds, so he has the motivation to control costs.
The Federal Reserve's purchase of treasury bonds is equivalent to releasing liquidity to the market in disguise. By releasing liquidity and lowering the market financing rate, it retains the option of cutting interest rates. This benefit leaves room for the Federal Reserve to operate in policy. At the same time, if bonds are purchased at a lower price, interest rates in the future can increase the price of bonds and gain positive returns from holding positions.
So we concluded that the Federal Reserve has the motivation to keep interest rate cuts slowing, and releasing liquidity can indeed solve some problems in the labor market, because improved liquidity can also lower financing rates.
Therefore, whether to cut interest rates in December may mainly depend on the period of data shortage in November-December. Whether the United States can release labor market data for a recession that exceeds expectations 20 days before the Federal Reserve's interest-setting meeting. Secondly, we should pay attention to the process of the Federal Reserve's bond purchase and release of liquidity. If the labor market is not significantly boosted after purchasing enough bonds, or inflation data falls back, the Federal Reserve will have enough motivation to continue to cut interest rates after buying enough bonds. Because no one wants money.
The yield on the 10-year Treasury bond is operating in a strong consolidation area near the upper edge of the box, and near 4.12 is a strong support level. It has currently fallen below slightly, indicating a trend that is contrary to the positive trend of the Federal Reserve's decline in interest rate cuts. However, judging from MACD and KDJ indicators, the overall Treasury bond yield is still bullish.
It can be found that treasury bond yields fell instead of rising after recent expectations of interest rate cuts have cooled down, showing the power of treasury bond buying. At the same time, the yield of 10-year treasury bonds did not fall but rose when the United States announced on October 30 that it would continue to cut interest rates by around 25bp. It also reflected that better risk appetite led people to sell treasury bonds at that time. It was also the day when the United States announced the end of QT that the Federal Reserve was also selling treasury bonds before.
At 16:16 Beijing time, the yield on the 10-year U.S. Treasury bond is now at 4.108%.