By Susan Heavey
WASHINGTON (Reuters) -The bond market is sending a signal that the Federal Reserve should be cutting interest rates, U.S. Treasury Secretary Scott Bessent said on Thursday, noting that yields on 2-year Treasury notes were lower than central bank's policy rate.
"We are seeing that two-year rates are now below fed funds rates, so that's a market signal that they think the Fed should be cutting," Bessent said in an interview on Fox Business Network's "Mornings with Maria" program.
The 2-year note yield on Thursday was about 3.57%, down about 5 basis points on the day and about three-quarters of a percentage point below the daily effective federal funds rate of 4.33%. The Fed's policy rate is set in a range of 4.25% to 4.50%, where it has been since December after it cut rates by a percentage point late last year.
Fed officials have been in a wait-and-see posture since as they assess the effects of President Donald Trump's new policies, particularly on how the sweeping tariffs on imported goods he has imposed will affect inflation, demand and the job market.
The spread between the Fed's rate and 2-year yields, a bond market proxy for expectations for where monetary policy is headed, has widened persistently over the last two months. That has come as fixed-income investors in both Treasuries and interest-rate futures have pivoted to bets the Fed will cut rates by a full percentage point this year - double the most recent median estimate among Fed policymakers themselves - as the economy weakens in the face of Trump's tariffs onslaught.
Indeed, the Commerce Department on Wednesday reported that the economy contracted unexpectedly in the first three months of the year because of a historic rush of imports to beat the tariffs, and many private economists now see a heightened risk of outright recession later this year.
Bessent, who as Treasury secretary typically meets weekly with Fed Chair Jerome Powell, said there had been a notable drop in yields on 10-year Treasury notes, and that is where he and the Trump administration are devoting more of their attention because that more directly influences borrowing costs for households and businesses.
That rate, influential to high-profile borrowing costs such as residential mortgages, has dropped by about half a percentage point since the Friday before Trump's inauguration in January, although bond markets have been particularly volatile over the last month due to the president's erratic implementation of tariffs.
The rate on 30-year fixed-rate mortgages was about 6.81% on average last week after climbing abruptly by about 20 basis points in mid-April on the heels of the bond market ructions.