Traders All But Rule Out a Fed Rate Cut This Month After Fresh Data

Bond markets moved swiftly to reprice interest-rate expectations after fresh labor data surprised to the upside. Traders largely abandoned bets that the Federal Reserve would begin cutting rates later this month, following a sharper-than-expected drop in the US unemployment rate for December. The data reinforced the view that the labor market remains resilient, reducing the urgency for near-term policy easing.

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The shift in expectations triggered an immediate selloff in short-dated US Treasuries, which tend to react more sharply to changes in monetary policy outlooks than longer-term bonds. Yields on two-year notes jumped nearly five basis points, pushing them to their highest levels so far this year. The move reflected growing confidence that the Fed is in no rush to pivot, even as inflation pressures continue to moderate.

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While traders pulled back from expectations of an imminent rate cut, the broader outlook for 2026 policy easing remained largely intact. Markets continue to price in two interest-rate reductions over the course of the year, with the first cut now anticipated around the middle of 2026. That recalibration suggests investors see the Fed as patient rather than restrictive, preferring to wait for clearer signs of cooling before acting.

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The reaction highlights how sensitive bond markets remain to economic data, particularly labor indicators that feed directly into the Fed’s dual mandate. A lower unemployment rate signals ongoing strength in hiring and wage support, both of which can keep inflation risks alive. For policymakers, this reduces the incentive to loosen financial conditions too quickly, especially after years of battling elevated price pressures.

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Short-maturity Treasuries bore the brunt of the adjustment because their yields are closely tied to expectations for the federal funds rate. Longer-dated bonds were comparatively more stable, reflecting the view that inflation and growth are likely to remain contained over the long term. The yield curve, while still shaped by policy uncertainty, continues to send mixed signals about the economy’s trajectory.

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For investors, the latest move underscores the importance of timing when it comes to rate-sensitive assets. Hopes for early rate cuts had supported bond prices late last year, but stronger-than-expected data has forced a reassessment. That dynamic can create volatility in fixed income markets, particularly at the front end of the curve, where positioning tends to be more crowded.

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Equity markets, meanwhile, have taken the shifting rate outlook largely in stride. Stocks have continued to benefit from solid economic momentum and expectations that any policy easing, even if delayed, will eventually support growth. Still, higher short-term yields can pose challenges for rate-sensitive sectors, including utilities, real estate, and highly leveraged companies.

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The Federal Reserve has consistently emphasized that its decisions will remain data-dependent, and the latest employment figures reinforce that message. Officials have signaled they want greater confidence that inflation is sustainably moving toward target before cutting rates. As long as the labor market remains firm, policymakers are likely to err on the side of caution.

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Looking ahead, bond traders will be closely watching upcoming inflation readings, wage data, and consumer spending figures for clues on the Fed’s next move. Any signs of renewed price pressures could push rate-cut expectations even further out, while softer data may quickly revive bets on earlier easing. This back-and-forth is likely to keep Treasury markets active in the months ahead.

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Despite the recent repricing, expectations for rate cuts later in 2026 suggest investors still believe the tightening cycle is effectively over. The debate has shifted from whether rates will fall to when and how fast that process will unfold. For now, stronger labor data has delayed the timeline, but it hasn’t changed the broader direction markets expect policy to take.

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As 2026 progresses, the balance between economic resilience and cooling inflation will remain central to bond market performance. Traders will continue to recalibrate positions as new data emerges, making flexibility and risk management essential. In the near term, however, December’s unemployment surprise has clearly tilted the scales toward patience, reinforcing the Fed’s wait-and-see approach.

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