Powell's remarks "scare" investors, market expects high interest rates to last longer!

Last Friday, stronger-than-expected economic data released in the U.S., along with new comments made by Federal Reserve Chairman Jerome Powell to Dallas business leaders last Thursday, are changing market participants' views on how much the Fed will cut interest rates next year.

This shift tends to suggest that borrowing costs will not decline as quickly as many had hoped—this view was reinforced by Powell's remarks to Dallas business leaders last Thursday, where he noted that policymakers do not need to rush to cut rates.

Last Friday, federal funds futures traders lowered their expectations for multiple Fed rate cuts by the same time next year. Currently, they expect the probability of four or more cuts of 25 basis points by October 2025 to be only 29.8%, down from 85.7% a month ago.

Traders also generally believe that there will be at most three cuts by then—keeping the federal funds rate target range around 3.75% to 4%, compared to the current level of 4.5% to 4.75%.

Meanwhile, the benchmark 10-year U.S. Treasury yield briefly broke through the key resistance level of 4.5%, indicating that yields have room to rise further and may continue to weaken stock valuations.

The stock market took a hit, with the three major U.S. stock indices closing lower again last Friday.

Peter Azzinaro, partner and senior portfolio manager at Agile Investment Management in Florida, stated, “In addition to the still-strong job market, there is a newly elected president who may have a more inflationary stance on tariffs.” These factors “lead us to believe that high rates will persist for a longer time, possibly even until 2026.”

He added in a phone call, “We believe the Fed will implement another 25 basis point cut in December, then pause until March of next year,” at which point Fed officials will have a better understanding of Trump's policies. Azzinaro also mentioned that he would not be surprised if the 10-year Treasury yield ultimately rises to 4.65% to 4.75%, while last Friday's closing level was around 4.43%.

The 10-year Treasury yield has risen by 80.4 basis points from the 52-week low of 3.62% reached on September 16, and technical strategists like Adam Turnquist from LPL Financial also agree with Azzinaro's view that Treasury yields have room to rise further.

Data released last Friday showed that U.S. retail sales in October were stronger than expected, and manufacturing activity in New York State surged this month, leading to a sell-off in Treasuries and an increase in yields. However, the sell-off eased by the end of the trading day, with the 10-year Treasury yield essentially flat for the day.

Mark Hackett, head of investment research at Nationwide in Ohio, stated, “Rising Treasury yields and Powell's cautious remarks are unfavorable factors, and uncertainty surrounding the Fed's policy path is increasing.” **As Powell pointed out, “the macroeconomic environment remains resilient,” and his comments have “spooked” investors **