10-year Treasury yield ends at 3.9%, its lowest level since July

The U.S. central bank left interest rates unchanged at 5.25%-5.5%, as expected, but surprised the market by suggesting it was done raising borrowing costs and would likely cut rates by 75 basis points in 2024 after the annual headline rate of the consumer-price index fell to 3.1% in November.

Read: History shows even the Fed can’t really predict what it does with interest rates a year out

The widely followed 10-year Treasury yield has fallen more than a full percentage point from the 5.005% intraday high it reached on Oct. 23. That decline has now exceeded the one which occurred during the onset of the COVID-19 pandemic in the U.S., when the 10-year rate dropped from 1.586% to 0.5755% from Feb. 19, 2020, to April 2, 2020, according to Tradeweb data.

Markets priced in an 81.4% probability that the Fed will leave interest rates unchanged again in January, according to the CME FedWatch Tool. The chance of at least a 25-basis-point rate cut by its subsequent meeting in March was seen at 77.2%, up from 64.5% just a week ago. And traders were mostly expecting the central bank to take its fed-funds rate target down to around 3.875% or lower by next December.

In a note, economists at Goldman Sachs, led by Jan Hatzius, wrote that they expect the Federal Open Market Committee “to cut earlier and faster” and are forecasting three consecutive quarter-point cuts to take place in March, May and June.

See also: Bond king calls for 10-year yield to slide much further as Goldman forecasts three Fed cuts in a row

In data released on Thursday, retail sales rose a solid 0.3% in November, a sign that the economy isn’t cooling off much ahead of the holiday shopping season. Initial jobless claims fell 19,000, to a total of 202,000 for the week that ended Dec. 9 — the lowest level since mid-October and well below the 220,000 that had been expected. And import prices fell for a second straight month as inflation eased.

What analysts are saying

“The biggest surprise by the Fed was a reduction in the median expectation for where the policy rate would end [in] 2024,” said Brij Khurana, a Boston-based fixed-income-portfolio manager at Wellington Management. “While this level is still above where the market is currently pricing the funds rate, most had anticipated the Fed would use the ‘dot plot’ to push back on the market pricing. The fact that the Fed itself anticipates cuts next year was perceived as dovish by the market.”

“The key takeaway for me is that the Fed is not that focused on market-implied easing financial conditions, and instead is solely focused on inflation getting to target,” Khurana said in an email. “In their view, despite a buoyant stock market, financial conditions are tight based on the fact that policy rates exceed inflation. They believe that inflation will ease to 2.4% by the end of next year, and therefore, the median policy rate of 4.625% would still be very restrictive in their view.”