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Home / Business / The bond market signals that the Fed may be too slow to cut interest rates

The bond market signals that the Fed may be too slow to cut interest rates



Federal Reserve Chairman Jerome Powell responds during a press conference in Washington D.C., USA, July 31, 2019.

Liu Jie | Xinhua | Getty Images

Market movements were modest after the Fed issued minutes of its last meeting, but the message was clear – the market still fears that the Federal Reserve will not be aggressive enough in its interest rate cuts to save the economy.

after the Fed is a 2:00 pm ET release of the protocol, the curve between the 2-year note and the 1

0-year note flattens out. It then turned a short time later Wednesday afternoon, with a 2-year return that exceeded the 10-year return. It also happened briefly last week, but did not last on a closing basis. Other parts of the yield curve have been reversed and remain that way, but the spread of 2 to 10 years is the most seen.

Fed chairman Jerome Powell speaks Friday, and pressure is on him to clarify the central bank's current stance on politics. The pros in the market are looking for Powell to resolve a debate in the market about whether the Fed will cut just a few times or embark on a longer cut rate for current interest rates.

Powell speaks at 10 a.m. ET at the Fed's annual Jackson Hole, Wyoming, symposium.

A reverse yield curve, if it stays the reverse for a while, is considered a strong low-economic warning.

"Looks like the Fed is going to be stubborn and the yield curve is starting to price it in," remarked Andy Brenner of the National Alliance.

The Fed, in its minutes of its last meeting, called its first interest rate cut more than a decade is a "recalibration", emphasizing that it is not at a "preset rate" for future cuts. The Federal Open Market Committee cut interest rates by a quarter-point on July 31, and after the meeting, Powell called the cut for a "mid-cycle adjustment," a term also used in the meeting minutes.

"If mid-range adjustment is not in the Jackson Hole speech, people will interpret it as opening the door to more cuts as opposed to two or three," said Michael Gapen, U.S. economist at Barlcays. Since the Fed's last meeting, bond yields, which are moving in the opposite direction, have fallen or moved deeper into negative territory.

The US 10-year was 2.07% ahead of the Fed's last meeting, and stood at 1.58% on Wednesday afternoon. The 2-year-old was about the same speed, but fluctuated after reaching a peak of 1.58%.

"If the FOMC does not indicate the urgency of cutting very aggressively, we are back to the world that is slowing growth, weak inflation and a Fed that risks not providing as much support as needed, which is the recipe for yield curve inversion , "said Jon Hill, rate strategist at BMO. "However, some of the economic data has shown green shoots … and there are concerns about financial stability that are reasonable. Cutting this early in the cycle before financial data transmission can lead to excessive risk taking."

Fed officials were clearly divided on the vote, with two wanting a 50 basis point cut, and several opposed it, including two dissents. The Fed is expected to cut interest rates by a quarter at the September meeting.

"This lowers Jay Powell's expectation on Friday, which could make a dovish tilt more explosive," noted Brenner.

Correction: The interest rate curve turned a short time later Wednesday afternoon. An earlier version failed the day.


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