Multiple Federal Reserve officials speak out in support of gradual interest rate cuts, leading to a significant drop in long-term US Treasury bonds

On Monday, several senior officials from the Federal Reserve made intensive statements. Dallas Fed President Logan, Minneapolis Fed President Kashkari, and Kansas City Fed President Schmid all support gradually lowering interest rates, slowing down the pace of the significant rate cut in September.

Influenced by the hawkish remarks of senior Federal Reserve officials, the market's expectations for rate cuts next year have decreased, leading to a sharp rise in U.S. bond yields. Traders have reduced their bets on Fed rate cuts next year, expecting a 133 basis point cut by the end of September next year. The 10-year U.S. Treasury yield rose by 11 basis points, approaching 4.19%.

Dallas Fed President: Caution Needed in Rate Cuts

On Monday, Dallas Fed President Lorie Logan stated that rate cuts by the Federal Reserve should be cautious, as there is still uncertainty in the U.S. economic environment. "If the economy evolves as I currently anticipate, gradually lowering the policy rate towards a more normal or neutral level will help manage risks and achieve our goals."

Logan said that reducing restrictive monetary policy would help the Fed balance the risks faced in stabilizing inflation and maximizing employment. However, any shocks could affect the path to normalizing rates, including the speed at which monetary policy should proceed and where rates should stabilize.

Logan revealed that businesses in the Dallas Fed's region are optimistic about steady growth in the next six months but also face many uncertainties.

The Fed initiated this round of easing at its September meeting with a significant 50 basis point rate cut. However, subsequent data showed that the U.S. labor market was stronger than Fed officials had expected. Currently, the market widely expects a 25 basis point rate cut at the Fed's November meeting.

Logan emphasized that the Fed needs to maintain flexibility and be willing to adjust at the appropriate time.

Having previously served at the New York Fed for many years, Logan also discussed the Fed's balance sheet and dynamics in the financing markets.

Logan stated that market liquidity remains very ample. Although the use of the Fed's overnight reverse repo tool has been declining over the past two years, the current balance is still significantly higher than pre-COVID-19 levels, providing additional liquidity cushion. Logan added that in the long run, these balances should be negligible. If the repo rate rises closer to the interest on excess reserves and the tool's balance does not decrease, lowering the overnight reverse repo rate may be appropriate.

Logan noted that recent pressures in the money markets appear to be temporary, and policymakers should tolerate these minor pressures to achieve an effective balance sheet size.

Regarding the Fed's balance sheet, Logan pointed out that mortgage-backed securities (MBS) remain a significant part of the balance sheet and are expected to continue to be so in the coming years, although the Fed ultimately plans to hold mostly U.S. Treasuries.

Logan once again urged all banks to sign and be prepared to use the Fed's emergency liquidity tools, such as the discount window when necessary. She also suggested that the FOMC may consider central clearing for its standing repo facility at some point, similar to what the Securities and Exchange Commission (SEC) has done for the broader U.S. Treasury market

Minneapolis Fed President: Expects Future Rate Cuts to be More Moderate

On the same day, 2026 FOMC voter and President of the Minneapolis Federal Reserve, Kashkari, said that he supported the significant rate cut by the Federal Reserve last month, but reiterated his support for future rate cuts to be done at a slower pace. "Currently, I expect some more moderate rate cuts over the next few quarters to bring rates to a neutral level, but this will depend on the data."

Kashkari stated that the current monetary policy of the Federal Reserve FOMC is still putting the brakes on the U.S. economy. However, the resilience of the U.S. economy makes him doubt whether the neutral rate is higher.

Kashkari mentioned that if he were to accelerate the pace of rate cuts, he would need to see clear evidence of a rapid weakening in the U.S. labor market. If the U.S. government budget/deficit "skyrockets to the moon," then the FOMC's policy rate will be higher.

Kashkari pointed out that U.S. consumers are feeling the pinch in their wallets. The previous high inflation issue in the U.S. was not caused by the labor market. It is difficult to analyze whether tariffs have caused a dangerous inflation cycle.

Kashkari also noted that geopolitical risks have not significantly impacted the oil market, which has always surprised him.

Kansas Fed President: Taking a Cautious Approach

President of the Kansas Federal Reserve, Jeffrey Schmid, stated that he tends to support the Federal Reserve FOMC in cautiously and gradually implementing monetary policy to avoid excessive actions. He hopes for a more normalized policy cycle, where the Federal Reserve maintains economic growth, price stability, and full employment through fine-tuning. "Especially considering the uncertainty about the end point of the policy, I make decisions in a cautious manner, hoping to avoid fueling market volatility and minimizing market fluctuations."

Schmid believes that slowing down the pace of rate cuts will allow the Federal Reserve to find the neutral rate. "In the absence of any major shocks, I believe we can achieve such a cycle, but I think this needs to be done cautiously and gradually."

He expects that when this round of rate cuts by the FOMC ends, rates may be significantly higher than before the COVID-19 pandemic. There is uncertainty about how low the rates should ultimately be lowered by the Federal Reserve.

Schmid pointed out that the U.S. labor market is normalizing and has not significantly deteriorated. He has "reasonable confidence" that inflation will fall back towards 2%.

Regarding reducing the Federal Reserve's balance sheet (QT), Schmid leans towards adjusting assets with shorter durations by smaller amounts