Fed Rate Cut Anticipation Rises as Bessent Signals Support; Jobs Data to Guide Markets

The U.S. Treasury Secretary Scott Bessent has amplified calls for Federal Reserve rate cuts, citing an inverted yield curve as a critical signal that markets demand monetary easing. With the two-year Treasury yield now below the federal funds rate—a key indicator of anticipated policy shifts—the administration’s push for lower borrowing costs has collided with the Fed’s cautious stance on inflation. Today’s jobs report will add critical context to this debate, potentially reshaping market expectations for the remainder of 2025.

The Yield Curve Inversion: A Market-Mandated Signal?

Bessent’s argument hinges on the persistent inversion of the two-year Treasury yield, which has fallen to 3.6% while the Fed’s benchmark rate remains at 4.33%. This spread, as of early May, reflects investor skepticism about the Fed’s ability—or willingness—to sustain its hawkish stance. The Treasury Secretary has framed this inversion as a “market signal that the Fed should be cutting,” emphasizing its alignment with the Trump administration’s goals of easing borrowing costs for households and businesses.

Critically, the inversion has persisted since mid-February, with the two-year yield briefly surpassing 4.36% before retreating. This dynamic has intensified pressure on the Fed, which has held rates steady at 4.25%-4.5% since late 2024. Fed officials, however, remain anchored to inflation data: the personal consumption expenditures (PCE) price index rose 3.6% in Q1 2025, far above the 2% target. Even core PCE, excluding volatile food and energy costs, edged up to 3.5%, complicating the case for immediate easing.

Markets vs. the Fed: A Growing Divide

Investors have already priced in a sharp divergence from the Fed’s cautious rhetoric. As of early May, the CME FedWatch Tool showed a 95% probability of no rate change at the May 7 meeting. However, markets are pricing in four rate cuts by year-end, totaling a 100-basis-point reduction—a stark contrast to the Fed’s own projections of slower action. This disconnect highlights a core tension: markets are betting on the Fed to prioritize growth over inflation control, while the central bank insists it will wait for “clearer signs of moderation.”

The 10-year Treasury yield, a key gauge for long-term borrowing costs, has fallen to 4.15% from 4.63% in January, reflecting this optimism. Yet Bessent’s advocacy has not gone unchallenged. Former Treasury Secretary Janet Yellen has warned that the administration’s tariff policies risk exacerbating inflation and undermining global confidence in U.S. assets. Meanwhile, foreign investors remain wary of the White House’s unpredictable trade stance, which has contributed to heightened volatility in bond markets.

Jobs Data: The Catalyst for Change

Today’s nonfarm payrolls report will be pivotal. Economists forecast a 185,000 gain in April jobs—a slowdown from March’s 326,000 but still historically strong. A weaker-than-expected reading could accelerate market demands for Fed easing, while a robust report might embolden the central bank to hold rates steady. The unemployment rate, projected to remain near 4.1%, will also be scrutinized for signs of labor market softening.

Conclusion: The Fed’s Tightrope Walk

The path forward is fraught with trade-offs. Bessent’s advocacy underscores the administration’s impatience with the Fed’s inflation-first approach, but the central bank’s hands are tied by stubbornly high core prices. Markets, meanwhile, are betting on a resolution by year-end, with the yield curve inversion and declining bond yields serving as their proof points.

If the Fed delays cuts beyond the third quarter, volatility could rise sharply, particularly if the PCE index shows no meaningful improvement. Conversely, a rate cut in June—or even July—would likely stabilize markets, though it risks undermining the Fed’s credibility on inflation. The upcoming jobs data will be the first major test of whether the economy can support further easing without reigniting price pressures.

With the yield curve inversion now at its steepest since 2022, and the market’s expectations pulling ever farther from the Fed’s cautious script, today’s report is more than just a data point—it’s a referendum on the Fed’s next move. The stakes for investors, from equities to Treasuries, could not be higher.