US yields advance after Fed flags slower easing pace next year
US 10-year yield hits 4-week high, 2-year rises to 3-week peak
US 2/10 yield curve flattened after rate decision
Fed dots show two cuts in 2025, in line with rate futures
Adds analyst comment, Fed rate forecasts; updates prices
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 18 (Reuters) -U.S. Treasury yields climbed to multi-week peaks on Wednesday after the Federal Reserve lowered interest rates by 25 basis points (bps), as widely expected, but flagged a slower pace of easing next year amid a persistently stable labor market and inflation that has become stickier than normal.
The benchmark policy rate is now down to the 4.25%-4.50% range. In its latest policy statement, the Federal Open Market Committee said "economic activity has continued to expand at a solid pace ," with an unemployment rate that "remains low" and inflation that "remains somewhat elevated."
Analysts said this suggested a likely pause at the next meeting in January. After the Fed statement, U.S. rate futures priced in a 94% chance of the Fed holding rates steady next month.
U.S. central bankers on Wednesday also released new estimates on rate forecasts, also known as the "dot plot", which called for two quarter-point rate cuts next year. That mirrored what the futures market has been showing over the last two weeks.
In the September meeting, in which the Fed cut by 50 bps, the dot plot showed rates at 3.4% by the end of 2025, or about 100 bps of easing.
"The main takeaway here is the Fed has sent a signal that they're not going to be quite as dovish as they've been in the past, that they are leaning towards fewer cuts next year, and I think that's a signal for markets to continue to price in even fewer than two and possibly move in the direction of none if the data comes in strong enough," said Gennadiy Goldberg, head of U.S. rates strategy, at TD Securities in New York.
"The Fed is not willing to keep cutting if they don't see inflation coming down enough, and their summary of economic projections suggested that they still expect inflation at two and a half percent on core PCE by the end of next year."
U.S. 10-year yield hit a fresh four-week high of 4.458% after the rate decision and was last up 6.9 bps at 4.454% US10YT=RR.
U.S. 30-year yields also advanced, climbing 4.8 bps to 4.628% US30YT=RR.
On the front end of the curve, the two-year yield, which is sensitive to the interest rate outlook, gained 6.7 bps to 4.308%US2YT=RR. It hit a new three-week high immediately after the Fed statement.
The U.S. yield curve flattened after the Fed decision, with the spread between two- and 10-year yields US2US10=TWEB last at 13.5 bps, from 15 bps late on Tuesday. The flattening reflected that with the Fed set to slow pace of rate cuts, the two-year yield has a little more room to rise
Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Karen Brettell; Editing by Jonathan Oatis and Chizu Nomiyama
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