Will Rising Treasury Yields and Tariff Risks Derail Fed Rate Cut Hopes?

US Treasury yields climbed across the curve on Wednesday, May 14, 2025, at 11:29 PM +04, as markets processed Tuesday’s Consumer Price Index (CPI) data and braced for upcoming economic releases, while a firm inflation outlook and tariff uncertainties reshaped Federal Reserve rate cut expectations. The 10-year Treasury note yield rose by 5.5 basis points to 4.525%, and the 2-year yield, closely tied to interest rate expectations, increased by 3 basis points to 4.049%. Real yields also surged to 2.21%, reflecting heightened market sensitivity to inflation dynamics, which capped gold’s upward movement, with spot prices holding at $3,244.90 an ounce, up just 0.25% on the day.

The yield uptick follows a positive market shift driven by the US-China 90-day tariff suspension, reducing duties to 30% on Chinese imports and 10% on US goods, a move that has bolstered risk sentiment. However, Fed Vice Chair Philip Jefferson cautioned that while the current 4.25%-4.50% policy rate is well-positioned, tariffs could complicate the inflation trajectory, with their impact—whether temporary or persistent—remaining uncertain. This uncertainty has led markets to scale back 2025 Fed rate cut expectations to 49.5 basis points, down from 76 basis points earlier in May, signaling a more cautious outlook on monetary easing amid steady inflationary pressures.

Adding to the economic backdrop, the US Congress approved elements of a sweeping budget package on Wednesday, advancing tax cuts that could add trillions to the national debt, potentially fueling inflationary pressures further. Investors are now focused on upcoming releases, including the April Producer Price Index (PPI), Retail Sales, and labor market data, which could provide additional clues on inflation and growth trends. The climbing real yields, calculated as the difference between nominal yields and inflation expectations, underscore market concerns about sustained price pressures, limiting gold’s appeal as a safe-haven asset in this environment.

As Treasury yields reach weekly highs, the interplay between tariff policies, fiscal decisions, and inflation data will be critical in shaping market expectations. The Fed’s cautious stance, coupled with reduced rate cut bets, suggests a tighter monetary policy path ahead, which could further strengthen the US Dollar—already at a DXY of 101.29 on Tuesday—and pressure risk assets. With US stocks showing mixed performance (S&P 500 up 0.8% to 5,888 points, Dow down 0.4% to 42,256 points), the coming data releases will be pivotal in determining whether yields continue their ascent or if renewed economic softness revives hopes for Fed easing.