How the Fed Could Respond to the Selloff
Fed Weighs Emergency Rate Cut and Bond Market Intervention
The Federal Reserve had intended to hold steady and observe how an economy already facing high inflation would react to sweeping tariffs introduced by the Trump administration. But escalating market volatility may not allow for patience.
Yields on the 10-year Treasury surged to 4.52% as the new tariffs — the most severe in a century — took effect at midnight, up sharply from 4% just a week ago. Early signs of dialogue between the U.S. and China calmed markets slightly, but uncertainty remains high.
Traders are now factoring in the possibility of an emergency rate cut. Federal funds futures for April suggest roughly a 20% chance of a move before the Fed’s next scheduled meeting.
Other measures are also under consideration. When the U.K. bond market collapsed following Liz Truss’s 2022 mini-budget, the Bank of England stepped in with temporary purchases of long-term government debt — precisely the area now under stress in the U.S.
That intervention worked. Thirty-year gilt yields had surged 130 basis points in just three days but stabilized after the Bank’s action. It even ended up turning a £3.5 billion profit on £19.3 billion in bond purchases, which were later unwound.
TS Lombard’s Dario Perkins noted the Bank of England was still able to raise rates by 300 basis points and resume quantitative tightening after the intervention. “You can intervene briefly in bonds and stay hawkish on inflation,” he said.
The Fed could also opt for a more technical move — targeting the overnight funding market. The swap rate between SOFR (Secured Overnight Financing Rate) and comparable Treasury maturities has been falling, a signal that liquidity is drying up and interbank lending is weakening.
