A Fed Cut Can Lower Borrowing Costs, but Credibility Comes First

The awkward fact behind hopes for a Federal Reserve rate cut is that markets are preparing for a hike. Ahead of the September 16, 2026 decision, investors expect tighter policy, while the 10-year Treasury yield has reached 5% this week for the first time in three years. A cut is therefore a hypothetical alternative, not the expected next step. The question is whether changing course would actually bring down the longer-term rates that households and businesses pay. (apnews.com¹)

Start with where yields have risen fastest. Between September 8 and September 14, the two-year Treasury yield increased 0.26 percentage points, the five-year rose 0.23 points, and the 10-year climbed 0.17 points. The 30-year increased just 0.09 points. Meanwhile, the effective overnight federal funds rate stayed at 3.63%. Borrowing benchmarks were moving ahead of the central bank, with the largest increases concentrated in maturities more exposed to its next several years of decisions. (federalreserve.gov²)

That pattern makes me skeptical of the claim that investors have simply revolted against long-term government debt. It fits an upward revision to expected Fed rates better than an isolated jump in compensation for holding the longest bonds. This is an inference, not a complete statistical decomposition. Still, the distinction matters: a market anticipating tighter policy is also a market the Fed can influence by credibly changing the expected policy path. (federalreserve.gov²)

Inflation pricing supplies a second check. Over the same period, the 10-year nominal Treasury yield and its inflation-protected counterpart both rose 0.17 percentage points. Their difference, the inflation breakeven, stayed at 2.37%. That measure includes inflation expectations, risk compensation and differences in how readily the securities trade. Its stability does not prove inflation uncertainty disappeared, but it gives little support to blaming that week’s increase on rising measured inflation compensation. (federalreserve.gov²)

The competing explanation deserves more than dismissal. Investors can demand a higher term premium, the extra return for holding a long bond rather than repeatedly investing in short-term debt. The Fed’s May financial-stability report placed one estimate near the top of its 15-year range, though around its longer-run median. A separate Fed model, developed by economists Don Kim and Jonathan Wright, estimated the 10-year premium at about 0.89 percentage points on September 4. Long-term risk compensation is a meaningful part of today’s borrowing costs. (federalreserve.gov⁵)

But an elevated premium cannot tell us what caused a subsequent increase. Nor should anyone pretend the models produce a uniquely correct answer. A Federal Reserve comparison found that four models attributed between 0.64 and 1.16 percentage points of the July–October 2023 yield surge to premiums, versus between 0.01 and 0.53 points to expected short rates. All assigned more to premiums, yet disagreed substantially about the split. Applying those models’ historical shortcuts to this September’s moves would produce approximations, not four independent measurements. I would not publish a precise percentage of the latest increase as settled fact. (federalreserve.gov³)

Treasury supply also needs a more careful diagnosis than “too many bonds.” Treasury’s August 5 financing statement maintained nominal note and bond auction sizes, including September offerings of $39 billion at 10 years and $22 billion at 30 years, matching June and July. Its August refunding nevertheless raised about $28.7 billion in new cash beyond replacing maturing securities. Unchanged auction sizes can coexist with substantial financing pressure, but they weaken the claim that a fresh increase in announced supply explains the latest jump. (home.treasury.gov⁷)

The September 10 auction offers an especially useful reality check. Treasury sold $22 billion of 30-year bonds at a 5.308% yield, the highest auction yield since August 2001. Yet bids totaled 2.61 times the amount sold, above the previous six-month average of 2.38. Dow Jones also reported that secondary-market 30-year yields had reached their highest levels since 2007. Buyers were demanding expensive financing, but they were showing up. One auction cannot establish durable demand strength; it does undermine a blanket story of buyers abandoning Treasury sales. (marketscreener.com⁸)

Taken together, I read the evidence as a case for substantial Fed influence, with important limits. The recent maturity pattern points toward policy repricing, inflation compensation was unchanged, and the long-bond auction attracted healthy demand at a high yield. Those observations leave room for supply and risk premiums without establishing that they have overwhelmed monetary policy. The Fed still has leverage over borrowing costs; promising broad relief from a single cut would overstate it. (federalreserve.gov²)

Historical research helps explain that leverage. A Federal Reserve study of policy surprises estimated that conventional easing which lowered the two-year Treasury yield by 0.10 percentage points reduced the 30-year mortgage rate by roughly 0.06 points. The authors also found reductions in investment-grade corporate borrowing yields, with communications about the future policy path playing an important role. These are historical estimates, not coefficients to plug mechanically into today’s mortgage quote. Crucially, the experiment concerns an unexpected change in market rates, not merely an announced overnight cut. (federalreserve.gov⁹)

The household benefit also has to pass through the mortgage business. Freddie Mac’s September 10 survey put the average offered 30-year fixed rate at 6.76%, up from 6.71% a week earlier. Between Treasury yields and a borrower’s rate sit compensation for mortgage-security risks, servicing and origination costs, and lender margins. Investors must account for homeowners’ ability to repay early when refinancing becomes attractive. Those additional costs can change independently of the Fed’s overnight decision, limiting how much benchmark relief reaches a new borrower. (freddiemac.com¹⁰)

Businesses show a similar distinction between the benchmark and the credit spread, the extra yield investors demand above comparable Treasury rates. From September 8 to September 14, the ICE BofA index yield for BBB-rated investment-grade companies rose from 5.71% to 5.90%, while its adjusted spread edged down. The BB-rated speculative-grade index yield increased from 6.11% to 6.34%, with its spread rising just 0.01 percentage points. That is evidence of rising benchmark costs rather than a large, broad increase in those borrowers’ risk charges. These are traded-bond index yields, however, not matched offers to individual companies seeking new loans. (fred.stlouisfed.org)

The weaker end of business finance remains a constraint. The Fed’s May report found rising spreads on leveraged loans and new private-credit loans even while corporate-bond spreads remained historically low. Refinancing pressure is also uneven: S&P Global reports that refinancing has pushed the global speculative-grade maturity peak out to 2031, but debt rated B-minus or lower still has $268.8 billion coming due in 2028, much of it concentrated in the United States. Lower benchmarks would help; they cannot make a fragile borrower creditworthy or ensure access to replacement debt. (federalreserve.gov⁵)

For me, the useful lesson is to judge a cut by the lasting expectations it creates. Fannie Mae’s account of late 2024 illustrates the distinction: stronger economic data and stickier inflation led markets to price less future easing, alongside greater concern about Treasury issuance. Mortgage rates consequently rose despite the Fed having begun to cut. The average 30-year mortgage rate went from 6.09% on September 19, the day after the half-point cut, to 6.84% on November 21. (fanniemae.com¹¹)