Quiet Time for Fed Members Allows for Uncertainty Over Rate Cut

It’s interesting to note that the chances of a 25-basis point rate cut have dropped to 75.5% after sitting at 100% for weeks. As far as the 50-basis point rate cut is concerned, some traders believe it could happen if the Fed wants to send a message to investors that it has their back. 
James Hyerczyk
Federal Reserve FOMC

U.S. Treasury yields dipped on Monday as investors continued to make portfolio adjustments ahead of next week’s widely expected U.S. Federal Reserve 25-basis point interest rate cut. There were no major economic releases and Fed speakers were on lockdown so volume was relatively light and the trade comparatively lackluster.

The trade could pick up on Tuesday with the release of the Home Price Index (HPI), Existing Home Sales and the Richmond Manufacturing Index reports.

The yield on the benchmark 10-year Treasury note was higher at 2.055%, while the yield on the 30-year Treasury bond was also higher at around 2.553%. The 3-month Treasury note and the 10-year Treasury note remained inverted.

According to the CME’s FedWatch tool, market expectations for a 25-basis-point rate cut are at 75.5%. Meanwhile, traders are also pricing in a 24.5% chance of a 50-basis-point cut.

Investors Still Looking for Clarity

Late last Thursday, dovish comments by New York Federal Reserve President John Williams shook up the fixed-interest rate markets as investors drove up the chances of a half-percentage point rate cut to 71.5%. However, by Friday, the chances had dropped to nearly 20% after a spokesperson at the New York Fed said his comments were not about policy but rather academic.

Early last week, Fed Chair Jerome Powell strongly suggested that he and his colleagues were poised to cut interest rates by a quarter percentage point later this month. Powell cited slow global growth and elevated trade tensions as the reasons for making the cut.

St. Louis Fed President James Bullard said, “I’d like to go 25-basis points at the upcoming meeting.” He characterized such a move as a recalibration, rather than kicking off multiple cuts.

“I think easing cycle is a little bit strong for this situation,” he said, instead citing episodes in the 1990s when the Fed made downward adjustments in the policy rate to take out insurance against external shocks and keep the economy growing.

Fed Vice Chairman Richard Clarida agreed with Williams saying, “You don’t need to wait until things get so bad to have a dramatic series of rate cuts. We need to make a decision based on where we think the economy may be heading.”

Some Fed Members Oppose Cuts

Richmond Fed President Thomas Barkin and Atlanta Fed President Raphael Bostic see little need for a rate cut at this time with the economy performing well even amid rising uncertainty. However, neither are Federal Open Market Committee voters this year.

However, Boston Fed President Eric Rosengren is a voter and he is against a rate cut.

“As long as the economy’s doing well, if that continues we don’t need accommodation,” Rosengren told CNBC.

Communication has been Bad

The recent gyrations in the financial markets suggest Fed communications could have been a lot better. However, this leads me to believe that during the current quiet period where Fed members are not allowed to make public comments, the trade in the Treasury markets could come to nearly a standstill.

It’s interesting to note that the chances of a 25-basis point rate cut have dropped to 75.5% after sitting at 100% for weeks. As far as the 50-basis point rate cut is concerned, some traders believe it could happen if the Fed wants to send a message to investors that it has their back.

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