Fedspeak Tuesday: Heightened Volatility if Bostic Hints at Rate Cut

U.S. Treasury yields inched lower on Monday as investors shrugged off Friday’s stronger-than-expected non-farm payrolls report and shifted their focus to Federal Reserve Chairman Jerome Powell’s testimony on Capitol Hill later in the week.

The focus on Tuesday is likely to be on Fedspeak. The key events later this week will be Powell’s testimony before the House Financial Services Committee Wednesday and the Senate Banking Committee on Thursday.

After soaring through the psychological 2% level on Friday, the yield on the benchmark 10-year Treasury note fell to 2.02% yesterday, while the yield on the short-term 2-year Treasury note rate inched higher to 1.868%.

Fedspeak Tuesday

Powell’s speech on Tuesday is listed as a major event, but he is actually due to make introductory remarks for Atlanta Federal Reserve President Raphael Bostic and St. Louis Federal Reserve President James Bullard at a conference in St. Louis while Quarles will make a keynote address on stress testing.

On May 20, Bostic said he does not see the central bank cutting interest rates, contrary to market expectations. Bostic expressed confidence in the economy, and in the Fed’s position on monetary policy. “The market is ahead of where I am,” he said. “I would say I’m not expecting a rate cut to be imminent, certainly not be September. Things would need to happen in order for that to play out.”

On June 25, Bostic said that he totally agrees with Chairman Powell’s view that the Federal Reserve will “act as appropriate to sustain the recovery.”

Bullard voted for a rate cut at the Federal Reserve’s monetary policy meeting on June 18-19. However, on June 25, he said he does not think the U.S. central bank needs to cut interest rates by a half-percentage point at its next meeting on July 30-31.

“Just sitting here today, I think 50 basis points would be overdone,” Bullard said in an interview with Bloomberg Television. “I don’t think the situation really calls for that, but I would be willing to go 25 (basis points).”

Fed Speaker Impact

Bostic didn’t see the need for a rate cut in late May, nor did he vote for one in June. Furthermore, he seems to be siding with Powell as both indicate policymakers will “act as appropriate to sustain the recovery.”

So we have to conclude that a dovish Bostic will be a surprise for traders. If he comes across as dovish then look for Treasury yields to fall along with the U.S. Dollar. His comments could also send gold and stocks higher.

Bullard, on the other hand, is likely to maintain his dovish stance especially since he voted for the rate cut in June. He could be the source of heightened volatility if he shifts gears and hints at the need for a 50 basis point cut. His credibility could take a major hint if he suggests a rate cut in July is not necessary.