The U.S Treasury Market Gains as the Reading on Inflation Matches Expectations

Treasury prices climbed after new inflation data came in right on target, reinforcing expectations that the Federal Reserve will move forward with another rate cut next month.

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The rally in Treasuries sent yields lower, with two-year notes the maturity most sensitive to shifts in Fed policy slipping by one basis point to 3.65%. Benchmark 10-year yields also declined, settling near 4.16%.

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The Commerce Department reported that the core personal consumption expenditures index (PCE), which excludes food and energy costs, rose 0.2% in August compared with the previous month. That reading matched economist forecasts and lifted the year-over-year rate to 2.9%. The PCE index holds particular weight on Wall Street, as it is widely viewed as the Fed’s favored measure of inflation trends.

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“These figures are pretty much in line with what markets had penciled in,” former St. Louis Fed President James Bullard said in an interview with Bloomberg Television. “The outlook still supports additional rate cuts at the next couple of FOMC meetings.”

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Traders in interest-rate swaps echoed that sentiment. Pricing reflects expectations for a 20-basis-point reduction at the Fed’s October gathering, with a cumulative 38 basis points of easing anticipated by year-end. Those forecasts remained unchanged following the inflation release. The Fed already delivered a quarter-point cut in September, lowering its target range to 4%–4.25%.

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For policymakers, the latest inflation data offered reassurance. “The numbers aren’t hot enough to cause concern at the Fed, so officials can keep their focus on underlying economic conditions rather than one-off tariff effects,” noted Kim Rupert, an economist at Action Economics.

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The steady inflation outlook provides the Fed more leeway to press ahead with its strategy of gradually reducing borrowing costs. Investors have been watching closely for any signs of renewed inflationary pressure that might derail the Fed’s plans, particularly with tariffs and global supply chain challenges still in play. So far, however, the data has reinforced the view that inflation is on a controlled trajectory.

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Bond market participants welcomed the confirmation. Short-dated Treasuries, which had already been reflecting expectations of easing, found further support from the report. The drop in two-year yields signals confidence that the Fed will stick to its current path without needing to recalibrate policy in response to hotter-than-expected inflation.

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Meanwhile, longer-term yields also edged lower, underscoring expectations for subdued inflation and modest growth ahead. The 10-year benchmark’s move down to 4.16% reflects market belief that economic conditions will allow rates to trend lower over time.

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For investors, the implications are significant. A steady inflation backdrop paired with anticipated rate cuts provides an environment where bonds can hold value while equities may find support from cheaper borrowing costs. At the same time, risks remain. A sudden flare-up in consumer prices or a shift in global economic dynamics could challenge the Fed’s easing cycle.

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Still, the consensus view is that the Fed has room to maneuver. With inflation readings tracking close to forecasts and growth showing signs of moderation, officials are unlikely to face pressure to reverse course in the near term. Market participants will be watching closely as upcoming data on employment and consumer spending add further context to the policy debate.

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For now, the message is clear: inflation remains contained, and the Fed is positioned to continue cutting rates to support the economy.

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