Bond Traders Will Follow New Fed Dots All the Way Into 2025

Bond traders who have come to terms with the prospect of higher-for-longer interest rates through 2024 are looking toward this week’s Federal Reserve meeting for clues on how to game out 2025 and beyond.

Treasuries inched higher on Tuesday as investors look to parse policymakers’ latest quarterly economic and interest rate projections — known as the dot plot — on Wednesday. As of March, officials were signaling three quarter-point cuts in 2024, but they’re expected to scale back that forecast in the face of a barrage of robust economic data, including strong May jobs growth.

Just hours before the Fed wraps up its two-day meeting, a fresh read on inflation will likely show prices running well ahead of the central bank’s comfort zone. With the data giving the Fed little leeway to cut rates soon, investors are now debating whether future easing will amount to only a smallish tweak of policy into next year, as opposed to the series of reductions many had been expecting. The difference may have big market consequences.

“We’re going to quickly turn the page to 2025,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. “Maybe we get one or two cuts this year, but how many are we going to get next year?” said Flanagan. “That will quickly become the center of attention as we move into the second half of this year.”

The Fed has maintained a two-decade-high policy-rate range of 5.25% to 5.5% since July as the economy has held fairly strong, leaving two-year Treasury yields hovering just below 5% and 10-year rates at around 4.5%.