Emergency Rate Cuts and Temporary Bond Purchases Among Fed Options
The Federal Reserve had hoped to take a wait-and-see approach, monitoring how an economy already grappling with elevated inflation would respond to the sweeping tariffs imposed by the Trump administration.
However, recent financial market turbulence may force its hand. The yield on the 10-year Treasury spiked to 4.52% at midnight, a sharp jump from just 4% a week earlier, as the most significant U.S. tariffs in a century took effect on Wednesday.
Although some calm returned after reports that China was open to renewed dialogue with the U.S., the bond market’s volatility has shifted expectations. Traders are now considering the possibility of an emergency rate cut. Based on the April federal funds futures contract, markets are pricing in about a 20% chance of a rate reduction before the Fed’s next scheduled meeting.
Other policy tools are also on the table. In 2022, when the U.K. bond market was roiled by the backlash to Prime Minister Liz Truss’s mini-budget, the Bank of England stepped in with temporary purchases of long-dated government bonds — the very segment now under pressure in the U.S. market.
That intervention proved effective. Thirty-year gilt yields, which had soared 130 basis points in just three days, stabilized. The Bank not only quelled the crisis but ultimately profited £3.5 billion on £19.3 billion in bond purchases, all of which were later unwound.
TS Lombard strategist Dario Perkins noted that the Bank of England was able to resume raising interest rates — by 300 basis points — after the intervention and continued its quantitative tightening program to shrink its balance sheet.
“You can intervene briefly in bonds and stay hawkish on inflation,” Perkins emphasized.
The Fed, for its part, could adopt an even more technical approach — focusing on the overnight borrowing market and the Secured Overnight Financing Rate (SOFR). The swap spread between SOFR and equivalent-maturity Treasurys has been collapsing, signaling that liquidity is drying up and interbank lending is faltering.
