Fed Rate Cuts May Not Lower Long-Term Bond Yields

The Federal Reserve cut interest rates by 25 basis points in December 2025, marking its third consecutive reduction this year. While the move lowered the federal funds rate to 3.50%-3.75%, long-term Treasury yields have not followed suit. The 30-year bond yield rose to 4.86%, its highest since September, underscoring the limits of monetary policy in influencing long-term borrowing costs.  

Key highlights from the announcement include  

• The Fed reduced the federal funds rate by 25 basis points, bringing it to its lowest since 2022.  
• Despite easing, the 30-year Treasury yield climbed to 4.86%, reflecting investor concerns over fiscal deficits and inflation.  
• Short-term yields fell slightly, with two-year notes sliding nearly eight basis points after the Fed’s decision.  
• Fed Chair Jerome Powell signaled only one rate cut in 2026, suggesting a cautious approach to further easing.  
• Analysts emphasize that structural factors—such as government borrowing, inflation expectations, and global capital flows—are driving long-term yields.  
• Market experts warn that investors should not rely solely on Fed cuts to reduce financing costs for long-term projects.  

The divergence between short-term and long-term yields highlights the complexity of monetary transmission. While Fed policy can influence liquidity and short-term rates, long-term yields are shaped by broader economic fundamentals. Rising fiscal deficits and sustained government borrowing are keeping long-term yields elevated, even as the Fed attempts to stimulate growth.  

For investors, the message is clear: Fed rate cuts may provide temporary relief in short-term markets, but structural pressures will continue to weigh on long-term bonds. This dynamic underscores the importance of monitoring fiscal policy, inflation trends, and global capital flows alongside central bank actions.  

Sources: Livemint, New Indian Express, Financial Express, Bloomberg, Trading Economics, CBS News