Rising Yields and Fed Policy Cast Doubts on US Stock Rally

Image Credit: Reuters

The rally in U.S. stocks faces a new challenge as Treasury yields climb, following the Federal Reserve’s unexpected shift in its 2025 interest rate projections.  

On Wednesday, the Fed signaled only two rate cuts for 2025, a reduction from the four previously anticipated, catching markets off guard. This announcement triggered a stock selloff, a surge in Treasury yields, and a stronger dollar. The central bank also raised its inflation forecast for next year, suggesting higher interest rates ahead.  

The uncertainty is compounded by concerns that the policies of incoming President Donald Trump could further drive inflation.  

Stocks, which had largely weathered the steady rise in Treasury yields, are now under pressure. Benchmark yields hit 4.52% after the Fed meeting—their highest in over six months—posing a risk to the rally in equities, which are already trading at elevated valuations.  

“Rates are the biggest risk for markets from here on out,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. “The Fed had declared a victory, but the reacceleration of inflation is forcing them to reassess.”  

The Fed’s more cautious outlook had immediate ripple effects across asset classes. The S&P 500 fell nearly 3% on Wednesday, marking its sharpest one-day decline since August, while the Nasdaq dropped 3.6%. Despite the pullback, both indexes remain up 23% and 29%, respectively, for the year.  

“The Fed played the role of Grinch today, taking back two rate cuts in 2025,” said Jamie Cox, managing partner at Harris Financial Group.  

Meanwhile, the dollar index soared to a two-year high, and gold prices slid by about 2%.  

Treasury yields, which move inversely to prices, were already trending higher ahead of the Fed meeting, reflecting investor expectations of a “hawkish cut” and concerns about the U.S. fiscal outlook. The Fed’s cautious tone, emphasized by Chair Jerome Powell in his press conference, further unsettled markets.  

“Markets are telling the Fed they’ve lost credibility,” said Jack McIntyre, portfolio manager at Brandywine Global. “They cut rates but didn’t make a convincing case for doing so.”  

Analysts warn that if benchmark yields surpass the 4.5% threshold, it could destabilize stocks and shift investor preference toward safer assets.  

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.