The Federal Reserve has reduced its benchmark interest rate by 1% since September 2024, aiming to give the U.S. economy breathing room after earlier aggressive hikes. 

Yet, the yield on the 10-year Treasury note, a key driver of borrowing costs, has risen to 4.80%, its highest level since 2023.

This apparent disconnect indicates how market forces, economic expectations, and fiscal policies shape long-term interest rates beyond the Fed’s direct control.

A snapshot of inflation and rates

Recent data from the US is a mixed bag. December’s Consumer Price Index (CPI) showed core inflation, which excludes volatile food and energy prices, increased by just 0.2% month-over-month.

That was a 0.3% drop from November’s reading. On a yearly basis, core inflation eased to 3.2%, marking the first significant decline in six months and raising hopes of progress toward the Fed’s 2% target.

However, the Federal Reserve is not yet satisfied. Meeting minutes from December reveal concerns among policymakers about sticky inflation and uncertainties surrounding fiscal, trade, and regulatory policies. 

Fed officials have scaled back their projections for rate cuts in 2025, reducing expectations from four cuts to two, citing the likelihood that inflation could remain elevated longer than anticipated.

Why are Treasury yields rising?

The rise in the 10-year Treasury yield is rooted in forward-looking market behaviour.

Investors determine yields based on expectations of inflation, economic growth, and fiscal policy risks.

While the Fed controls short-term rates, longer-term rates like the 10-year Treasury is a measure of broader market sentiment.

One significant factor is the U.S. economy’s surprising resilience. December job data was strong, with 256,000 new positions added, and the unemployment rate edged down to 4.1%. 

Such strength reduces the perceived need for aggressive monetary easing, leading investors to adjust their long-term inflation and growth outlooks upward.

Fiscal policies under President Donald Trump are also influencing yields. His proposed tax cuts and higher tariffs could increase inflationary pressures while driving up government debt.

This raises concerns about fiscal sustainability, prompting investors to demand higher returns for holding long-term bonds.

Compounding these pressures, the US Treasury’s recent shift toward shorter-term borrowing has reduced the supply of longer-term bonds, creating further upward pressure on yields.

Another layer is the term premium—the extra yield investors demand to take on long-term risks. After years of being negative, the term premium is now at its highest in a decade, reflecting growing uncertainty about the economic outlook.

This steepening of the yield curve is a sign that the bond market is pricing in greater long-term risks, even as inflation expectations remain relatively stable in the near term.

Globally, this phenomenon isn’t limited to the US, European bonds are approaching their late-2023 yield peaks, and Japan’s government bonds have surged to levels not seen since 2011.

This global repricing of long-term risk could indicate a deeper worry in bond markets, perhaps signalling the end of the post-Volcker era of stable, declining yields. 

What do the Fed officials think?

Fed officials remain divided on the timing and extent of future rate cuts.

Federal Reserve Governor Christopher Waller remains “dovish”, suggesting that favourable inflation data could lead to additional cuts in the first half of 2025.

He noted that March could see a cut if recent disinflationary trends persist. However, he also cautioned that if inflation remains stubborn, rate reductions might be limited to one or two for the year.

New York Fed President John Williams leans more towards the “hawkish” side, stating that while disinflation is progressing, achieving the Fed’s 2% inflation target will take time.

He highlighted uncertainties around fiscal and trade policies as key risks to the economic outlook.

Similarly, Richmond Fed President Tom Barkin underscored the need for restrictive policies to fully curb inflation, even as recent data showed progress.

Investor sentiment and market implications

The disconnect between the Fed’s rate cuts and rising long-term yields has sparked debate among investors and economists.

Traders are now pricing in the first full rate cut by July, with expectations of around 40 basis points in reductions for the year. 

However, many analysts warn that this optimism may be premature. Most believe that it will likely take several months of consistent inflation improvement before the Fed considers accelerating its rate-cutting pace.

Meanwhile, strong labour market data has eased fears of a sharp economic slowdown. Wage growth, hiring rates, and other employment metrics suggest that the Fed’s policies are restraining the economy without triggering overheating.

The divergence between Fed policy and market behaviour highlights the importance of flexibility in the current environment.

Persistent inflation or unexpected fiscal shifts could prolong uncertainty, making diversification across asset classes and geographies essential.

For bond investors, this is a rare opportunity to reassess duration strategies.

With 10-year Treasury yields at multi-year highs, locking in higher yields on long-term bonds can provide stability and attractive returns.

However, shorter-duration bonds may still be a safer play for those wary of inflation or fiscal shocks in the medium-term.

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Emboldened by the prospect of a friendlier Trump administration, Wall Street banks are ramping up efforts to overhaul US capital rules.

In a Reuters report, industry executives reveal an ambitious lobbying agenda, targeting reforms to the “Basel Endgame” capital rule, reductions in global bank surcharges, adjustments to leverage constraints, and revisions to the Federal Reserve’s annual stress tests.

Banks argue these regulations, enacted after the 2007-2009 financial crisis, are excessive, tying up nearly $1 trillion that could otherwise fuel the economy through lending.

Speaking during earnings on Wednesday, David Solomon, CEO of Goldman Sachs – which lobbied hard to water down Basel – said he expected the change in administration would lead to a new approach to capital rules.

It feels like we’re in an environment where there could be a constructive discussion about improving the transparency, clarity and consistency around this.

Recent wins fuel confidence

The banking sector’s confidence stems from its partial victory last year, where lobbying efforts halved the additional capital requirements under the Basel proposal.

The Federal Reserve also agreed to review its stress tests.

Buoyed by recent successes and anticipating the appointment of industry-friendly officials under Trump’s administration — including a new Federal Reserve regulatory chief arriving nearly 18 months ahead of schedule — banks view this as a rare chance to reshape capital rules, Reuters said citing industry executives who spoke on anonymity.

The executives said that after enduring years of criticism following the financial crisis, major banks believe the time for apologies has passed.

They cite their resilience during the COVID-19 pandemic and their pivotal role in stabilizing regional banks during the 2023 turmoil as evidence of their financial strength, arguing that they should no longer be subjected to overly burdensome regulations.

Speaking during earnings on Wednesday, JPMorgan CGO Jeremy Barnum, said,

All we want is a coherent, rational, holistically assessed regulatory framework that allows a bank to do their job supporting the economy that isn’t reflexively anti-bank…The hope is that we get some of that.

Legal and political shifts strengthen banks’ position

Adding to Wall Street’s momentum is a judiciary increasingly skeptical of overreaching regulators.

A Supreme Court ruling in June overturned a precedent requiring courts to defer to agency interpretations of ambiguous laws.

This evolving legal landscape, acknowledged by the Fed in its stress test review, gives banks more leverage to push for reforms.

“The pendulum swings back and forth in terms of who has more power,” said Ed Mills, Washington policy analyst at Raymond James.

“That pendulum has now swung back to the banks. This is a shift that is about 15 years in the making.”

Lobbying targets weaker Basel rules and lower surcharges

One major focus for banks is weakening the Basel Endgame rules, which overhaul risk assessment frameworks.

The Fed’s regulatory chief Michael Barr previously suggested that revisions could increase capital requirements by 9%, down from the original 19%.

However, banks aim to bring this figure closer to zero, sources said.

Banks largely agree that it is preferable to solidify a weaker rule under Trump’s administration rather than risk regulators shelving the project, which could lead to a future Democratic administration reinstating a stricter version, according to sources.

At a conference last month, Bank of America CEO Brian Moynihan emphasized that regulators should finalize the Basel framework with minimal impact rather than “leave it open.”

In addition, Wall Street is lobbying to lower the $230 billion capital surcharge levied on globally systemic banks (GSIBs) and adjust the supplementary leverage ratio (SLR).

The SLR currently requires banks to hold capital against all investments, regardless of risk. Banks want super-safe assets like U.S Treasuries exempted from these calculations.

The Federal Reserve’s annual stress tests, designed to assess a bank’s resilience to economic shocks, have long been a point of contention.

Banks have criticized the tests for being opaque and overly stringent.

Last year, the Fed announced a review of these tests. However, banks are simultaneously pursuing legal action to increase their transparency, signaling the high stakes attached to this regulatory tool.

Regulatory leadership changes bolster banks

The industry’s optimism is further buoyed by changes in regulatory leadership.

Republican Fed governor Michelle Bowman, a critic of Michael Barr’s capital framework, is a strong contender to replace him as the Fed’s regulatory chief.

Similarly, Travis Hill, poised to become the acting Federal Deposit Insurance Corporation (FDIC) chair, supports expanding Basel reforms to address additional capital issues.

With these appointments, banks see an opportunity to cement a more pragmatic regulatory environment.

While Wall Street’s lobbying gains momentum, some regulators remain cautious.

In an interview with Reuters, acting Comptroller of the Currency Michael Hsu, a top bank regulator, said it was reasonable to question how capital is allocated, but that the overall amount in the system “is about right.”

“On a case-by-case…you turn all the dials down, and then you zoom out and you say ‘uh-oh we’ve ended up with a much weaker system’,” Hsu warned.

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A slim majority of economists surveyed by Reuters believe the US Federal Reserve will hold its key interest rates steady during its January 28-29 meeting and likely resume cuts in March.

The decision will be influenced by the administration of President-elect Donald Trump, whose policy actions are expected to shape the economic outlook in the coming months.

The poll, conducted just before Trump’s inauguration, suggests that any substantial rate cuts may be limited due to lingering inflation pressures and uncertainties surrounding the incoming president’s economic policies.

Fed faces challenges amid rising inflation and new policies

While the Federal Reserve is expected to maintain its current policy stance for now, the prospect of an economic stimulus package from Trump’s administration has fuelled concerns about rising inflation.

“If they deliver anything close to what they promised on the tariff front, then we are going to probably see a stalling of disinflationary pressures, where the Fed is not going to be cutting,” said Jonathan Millar, senior US economist at Barclays.

“At least at a minimum, not as rapidly as they did in the last fall, but also the possibility they could be on hold for quite a while.”

Millar suggests that the Fed may not be able to cut rates as quickly as it did in the past, and there’s a possibility it could keep rates on hold for an extended period if inflation increases as expected.

This shift in the Fed’s policy approach would largely depend on how aggressively Trump pursues his economic pledges.

Mixed outlook for the US economy and Fed rate path

Since the Fed’s last rate cut in December, the US economy has shown signs of strength, with inflation cooling and a robust job market that saw impressive gains in December.

This has led some economists to suggest that further economic stimulus may not be necessary, especially considering that the economy is already performing well.

According to the poll, 103 economists participated, all predicting that the Federal Open Market Committee (FOMC) will keep interest rates at 4.25%-4.50% during the January meeting.

A significant majority, about 60%, expect the Fed to begin cutting rates in March.

However, economists have become more cautious about the future path of interest rate cuts, with fewer expecting significant cuts this year compared to previous projections.

Trump’s policies and inflation

One of the key concerns for economists is how Trump’s policies—especially the introduction of tariffs, immigration restrictions, and new fiscal measures—will affect inflation.

The survey indicates that inflation is likely to remain above the Fed’s 2% target at least until 2027, as the US economy adjusts to the changes brought on by the new administration.

“We expect the FOMC to be confronted with a pickup in inflation associated with the new administration’s tariff, immigration and fiscal policies,” said James Egelhof, chief US economist at BNP Paribas.

“Coming right on the heels of the high inflation of the post-pandemic recovery, we see (an) elevated risk that above-2% inflation becomes entrenched in the economy, leaving the FOMC pursuing a more cautious path to manage this risk.”

Slower growth in the US economy?

Despite the anticipated inflationary pressures, the US economy is projected to continue expanding in 2025.

The survey predicts a 2.2% growth rate for 2025 and 2.0% growth in 2026, which is faster than the Fed’s current non-inflationary growth rate of 1.8%.

This stronger-than-expected growth is likely to add to inflationary pressures, further complicating the Fed’s policy decisions.

Despite these concerns, most economists agree that a rate hike this year is unlikely.

However, a strong economy and continued inflationary pressures could bring rate hikes back into consideration, but this is expected to be more of an issue in 2026, as policymakers adopt a wait-and-see approach in 2025.

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The US Supreme Court has upheld the law mandating China-based ByteDance to divest its ownership of TikTok by Sunday, or face an effective ban of the popular video-sharing app in the United States.

The ruling underscores growing national security concerns tied to TikTok’s data collection practices and alleged links to the Chinese government, placing the platform’s 170 million American users at risk of losing access.

The decision supports the Protecting Americans from Foreign Adversary Controlled Applications Act, signed into law by President Joe Biden in April 2024.

The court’s unanimous opinion stressed that TikTok’s massive data collection and susceptibility to foreign influence pose significant threats to US security.

Justice Sonia Sotomayor and Justice Neil Gorsuch added separate concurring opinions.

TikTok’s uncertain future in the US

ByteDance has resisted divestment, leaving the app’s fate uncertain. While TikTok may remain functional on devices where it is already installed, the company has threatened a complete shutdown of the platform if forced to sell.

The court’s ruling also pressures third-party service providers, including Apple and Google, to remove TikTok from app stores after the January 19 deadline. Failure to comply could result in penalties for these tech giants.

White House press secretary Karine Jean-Pierre reaffirmed the administration’s stance, emphasizing that TikTok could remain available under US ownership or an arrangement that resolves security concerns.

“Implementation of this law will transition to the next administration, which takes office Monday,” Jean-Pierre stated.

National security vs. free expression

The ruling has sparked intense debate about national security and free speech.

US Solicitor General Elizabeth Prelogar defended the law, citing TikTok’s ties to ByteDance and potential influence from the Chinese Communist Party.

On the other hand, TikTok’s lead attorney Noel Francisco argued the act infringes on the First Amendment rights of millions of users who rely on the app for creative expression, news, and business promotion.

Kate Ruane, director of the Center for Democracy and Technology, criticized the decision.

“This ruling undermines the free expression of TikTok users in the US and worldwide,” Ruane was quoted as saying by CNBC, noting that the platform has become a vital tool for sharing information and fostering creativity.

As the deadline looms, TikTok creators are urging followers to migrate to platforms like YouTube, Facebook, and Instagram.

A CNBC report revealed that Instagram leadership has been preparing for a potential influx of users.

Meanwhile, TikTok-lookalike app RedNote has surged to the top of Apple’s App Store, indicating growing interest in alternatives.

ByteDance’s refusal to sell leaves room for speculation about potential buyers, including Elon Musk, as Bloomberg reported that the Chinese government is considering contingencies to retain TikTok’s US operations.

Analysts estimate TikTok’s US assets could fetch $40 billion to $50 billion if sold.

With the clock ticking, all eyes are on ByteDance and the incoming Trump administration to determine TikTok’s fate in America.

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Donald Trump, the US president-elect, announced on his social media platform, Truth Social, that he had a “very good” phone call with Chinese President Xi Jinping ahead of his return to the White House next week.

The conversation, which marked the first interaction between the two leaders since Trump’s departure after his first term, focused on critical global issues, including trade, fentanyl, and the controversial TikTok app.

“I just spoke to Chairman Xi Jinping of China,” Trump wrote.

It is my expectation that we will solve many problems together, and starting immediately.

He further emphasized the potential for both nations to work collaboratively, stating, “President Xi and I will do everything possible to make the World more peaceful and safe!”

Trump-Xi phone call: a promising tone

According to a readout from China’s Foreign Ministry, Xi echoed Trump’s optimism, stating that both leaders “attach great importance to mutual interactions” and are looking forward to a positive start in US-China relations during Trump’s second term.

However, the call comes at a time of heightened tension between Washington and Beijing, as geopolitical and economic challenges continue to strain ties between the two superpowers.

Just hours after the call, the US Supreme Court cleared the path for a ban on TikTok, the China-based app owned by ByteDance, to take effect on Sunday.

The ruling rejected TikTok’s appeal, which argued that the ban violated the First Amendment.

The app’s future now hangs in the balance, adding another layer of complexity to US-China relations.

Xi to skip Trump’s inauguration

While Xi conveyed his congratulations to Trump following his reelection in November, he has opted to skip the inauguration ceremony in Washington, DC, scheduled for Monday.

Instead, Vice President Han Zheng will represent China at the event.

This decision underscores Beijing’s cautious approach to navigating its relationship with the Trump administration.

Xi’s earlier congratulatory message to Trump included a reminder of the mutual benefits of cooperation and the dangers of confrontation.

“The US and China stand to gain from cooperation and lose from confrontation,” Xi said, expressing hope for a constructive relationship during Trump’s second term.

Trump-Xi phone call: trade, tariffs, and Taiwan

While Trump expressed a willingness to cooperate with China, his rhetoric on certain issues remains firm.

As a candidate, Trump vowed to impose steep tariffs on Chinese goods, a stance that shaped his first term.

Now, as president-elect, he has reiterated his commitment to holding Beijing accountable, proposing a 10% increase in tariffs until China takes significant steps to curb the flow of illegal drugs, including fentanyl, into the US.

The Taiwan issue also emerged as a point of contention. During the call, Xi reiterated Beijing’s position on Taiwan, labeling it a “breakaway territory” and stressing that unification with the mainland remains a priority.

While Trump was seen as a staunch supporter of Taiwan during his first term, his rhetoric has since evolved.

Recently, he criticized Taiwan for allegedly “stealing” American chip manufacturing jobs and suggested that the island nation should contribute more to US military protection.

Trump’s cabinet of China hawks

Trump’s cabinet picks signal a potentially tougher stance on China.

Prominent China critics, including Senator Marco Rubio, nominated for secretary of state, and former Fox News host Pete Hegseth, tapped for defense secretary, indicate a team prepared to confront Beijing on various fronts.

Rubio, who is currently sanctioned by Beijing, has consistently called for stricter measures against China, while Hegseth has warned of China’s ambition to surpass the US in global dominance.

Role of Elon Musk in US-China relations

Amid this backdrop, Elon Musk, CEO of Tesla, remains a unique factor in US-China relations.

With Tesla manufacturing more than half of its vehicles in China, Musk has maintained a cooperative relationship with Beijing.

His comments advocating for a “win-win” dynamic between the US and China sharply contrast Trump’s zero-sum approach.

Musk’s influence and frequent meetings with Chinese officials add an intriguing dimension to the evolving bilateral relationship.

As Trump prepares for his inauguration, the phone call with Xi underscores the delicate balance between collaboration and contention in US-China relations.

While both leaders expressed optimism, deep-rooted differences on issues like trade, technology, and Taiwan loom large.

The coming weeks will test whether this “very good” phone call translates into meaningful progress or sets the stage for further tensions.

This pivotal conversation has undoubtedly captured global attention, with its implications stretching across diplomacy, trade, and technology.

As the world watches, the outcomes of Trump’s second term will shape the future trajectory of US-China relations.

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