TLT, Bond Market Still Pricing in December Rate Cut

The FOMC meets next week, and the bond market remains confident that the Fed will cut rates as the long bond proxy iShares 20+ Year Treasury Bond ETF (TLT) holds on to recent gains and the Fed Funds Futures’ bet moves higher. 

Friday’s jobs report was the latest confidence builder as it revealed no surprises. Meanwhile, inflation concerns over Trump’s proposed tariff and tax cut plans have eased since Scott Bessent was nominated as Treasury Secretary. 

The Bureau of Labor Statistics reported on Friday that 227,000 jobs were added in November, slightly exceeding economists' forecast of 220,000. Meanwhile, the unemployment rate rose to 4.2%, up from 4.1% in October. 

These numbers are in line with what the Federal Reserve and fixed income markets were expecting. Thus, there’s no change in the recent upward trajectory for TLT’s price, which is up 4% since Bessent’s nomination announcement on Nov. 22, as Wall Street views his economic philosophies as decidedly sound.  

TLT traded mostly flat in the hours following Friday’s jobs report, while traders boosted the odds of a rate cut at the Fed's final meeting of 2024 to 85% following the economic data release. The probability of a rate pause in January ticked up to 63%. 

TLT’s Future Cloudy on Inflation, Rate Outlook for 2025

The U.S. inflation and interest rate outlook for 2025 will be influenced by a combination of economic and policy factors. Inflation is expected to moderate but could remain above the Federal Reserve's 2% target due to wage pressures in a tight labor market and Trump’s proposed tariffs and plans for tax cuts.  

The Fed may keep interest rates elevated or adjust them gradually to balance economic growth with inflation control. Key factors, including global energy prices, fiscal policy, and labor market trends, will play a critical role in shaping inflation and rate decisions. 

Thus, TLT’s price and Treasury yields may not fluctuate much in 2025 unless there are surprises, such as a spike in inflation or an economic slowdown. Here’s how tariffs and tax cuts might affect inflation and interest rates: 

Tariffs and Inflation, Interest Rates

• Inflationary impact: Tariffs raise the cost of imported goods, increasing consumer prices and fueling inflation. 
• Interest rates: To combat higher inflation, central banks may hike interest rates, potentially slowing economic growth. 

Tax Cuts and Inflation, Interest Rates

• Inflationary impact: Tax cuts boost disposable income and demand, which can lead to higher prices if supply is constrained. 
• Interest rates: Sustained inflation from tax cuts may prompt the Federal Reserve to maintain or increase interest rates to stabilize prices.