2025 Fed Rate Cut Sparks Bond Rally Amid 2026 Inflation and Data Risks

This analysis examines the Federal Reserve’s (Fed) December 10, 2025, 25-basis-point (bps) rate cut—its third of the year—lowering the federal funds rate range to 3.5% to 3.75% [2][3][4][5]. The decision included $40 billion in Treasury bill purchases starting December 12 to boost short-term funding market liquidity [1]. The bond market reacted positively on December 11, with the 10-year yield falling 3.5 bps to 4.151% (and as low as 4.12%) and the 2-year yield dropping 5 bps to 3.56% (3.51% later) [1][5].

Critically, the cut occurred without the Fed seeing delayed October/November inflation data (held up by a 43-day government shutdown ending November 12), which is now scheduled for release on December 18 [1][6]. Andrew Wells, CIO at SanJac Alpha, warned the decision could “look reckless” by January if this missing data shows accelerating inflation or improved unemployment, undermining the Fed’s data-dependent policy claim [1].

Adding to long-term concerns, President Trump’s One Big Beautiful Bill Act (OBBBA)—a tax overhaul extending TCJA provisions with most changes effective January 1, 2026—could boost consumer spending and demand-driven inflation next year [1][7][8]. This could reverse the current bond rally by pushing long-term yields higher. The Fed’s decision also included three dissenters (the first since 2019), signaling a split on balancing employment and inflation mandates and increasing future policy uncertainty [2].

1. Data Dependency Gap
   : The Fed’s cut without access to critical inflation data creates a credibility risk; a strong inflation report on December 18 could trigger a bond sell-off and erode trust in Fed decision-making [1].
2. Policy Division
   : The three dissenters highlight growing disagreement within the Fed about the timing and pace of rate cuts, which may lead to more volatile market reactions to future policy announcements [2].
3. 2026 Inflation Spillover
   : The OBBBA tax cuts, while stimulative, introduce a delayed inflation risk that could force the Fed to reverse course on rate cuts next year, disrupting the bond market [1].

• Ill-Timed Cut Recklessness
  : Delayed inflation data showing acceleration could make the December cut appear premature, damaging Fed credibility and triggering a bond sell-off [1].
• 2026 Inflation Spike
  : OBBBA tax cuts could boost consumer demand, leading to higher inflation and rising long-term yields, reversing the bond rally [1].
• Policy Uncertainty
  : Fed dissenters and conflicting data (delayed inflation, 2026 tax impacts) increase market volatility risk in the short to medium term [2].

• Short-Term Bond Gains
  : The current bond rally offers near-term opportunities for investors holding short-to-medium duration Treasury securities [1][5].
• Data-Driven Trading
  : The December 18 inflation data release could provide clarity on Fed policy direction, creating trading opportunities based on validated or refuted rate cut rationale [1][6].

The Fed’s third 25-bps rate cut of 2025 has sparked a bond market rally, but risks loom. Delayed October/November inflation data (due Dec 18) could validate or refute the cut’s timing, while 2026 OBBBA tax cuts may fuel inflation. Three Fed dissenters signal policy division, adding uncertainty. Investors should monitor the upcoming inflation data release and assess the potential long-term impacts of the tax overhaul on inflation and bond yields.