Could Fed Rate Cut Further TLT's Fall?

With election day over, many investors will now be turning their attention to the next big event of the week: the Fed’s latest monetary policy decision.

On Thursday, the U.S. central bank is widely expected to announce that it’s slashing its benchmark federal funds rate by 25 basis points to a range of 4.5% to 4.75%.

That would mark the second-straight interest rate cut after the Fed reduced rates by 50 basis points in September. That cut came as data showed inflation waning sustainably toward the Federal Reserve's goal of a 2% increase annually and the economy slowing gently. The move was the Fed's first Fed since July 2023, when the central bank completed a rapid rate hiking cycle that took rates from close to zero up to more than 5.25% in less than a year and a half.

TLT Tumbling

Bond ETFs have fallen significantly since the Fed’s September rate cut. The iShares 20+ Year Treasury Bond ETF (TLT) made its 2024 high on Sept. 16, two days before the Fed’s cut.

It’s since fallen over 9% from those levels, pushing it into the red for the year by -3.8%.

Investors have attributed the decline in TLT and other bond ETFs to two factors— stronger-than-expected economic data that is likely to slow the pace of Fed rate cuts; and concerns that a new government in 2025 could lead to higher inflation and deficits. 

Investors will pay close attention to Fed Chair Jerome Powell’s comments on Thursday to see whether he thinks markets are right about the trajectory of the federal funds rate.

Currently, the futures market suggests that rates will bottom out around 3.5% at the end of next year. If that’s the case, the current 10-year yield of 4.3% and 30-year yield of 4.5% certainly look reasonable. 

The Fed is scheduled to make its rate decision at 2 p.m. Eastern Time, while Fed Chair Powell will hold his press conference half an hour later.