The Fed cut policy rates by one percent from September to December 2024. This seems like ancient history, in part because the rate cuts had no lasting effect on everyday interest rates that investors and households care about most. The 10-year US Treasury yield has risen by 75 basis points since the first rate cut last September, and the average 30-year mortgage rate remains near 7%.
Source: RiskBridge, Bloomberg, Citi
While it’s not unusual for the Treasury curve to steepen during a Fed easing cycle, the “Noah’s Ark Steepener” (some bull steepening as short yields fall at the front, some bear steepening as long yields rise in the back) says less about monetary policy effectiveness and more about how markets perceive a loss of monetary policy independence or worsening fiscal conditions in the country.
One lesson from the 2024 rate cuts is that the Fed influences short-term interest rates but may have far less control over longer-term rates. A steeper yield curve in 2025 may not be a sign of the economy’s future direction, but the lack of response in long-term yields to the large drop in cash rates signals that investors remain skittish about owning bonds. There may not be much the Fed can do about that. Still, it risks losing its reputation as a powerful policymaking body if it continues to move short-term rates down without creating much, if any, stimulative effect on the economy.
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