Powell Smashes Yield Curve Flatter by Sowing Doubts on Rate Cuts
Traders are unhappy that the Fed viewed these cuts as more of a mid-cycle adjustment than the beginning of a new easing cycle.
(Bloomberg) -- The flattening U.S. yield curve is signaling that bond traders aren’t as confident as Federal Reserve Chairman Jerome Powell that what he calls a “mid-cycle adjustment” in rates will be enough to keep the economy expanding.
Short-dated Treasuries weakened and the long end rallied Wednesday after Powell said the Fed’s first rate cut since 2008 was designed to “insure against downside risks” rather than mark the start of a long cycle of policy easing.
Traders pulled back on the amount of Fed cut they expect. The 2- to 10-year spread, one of the most closely watched indicators of impending recessions, shrank to the narrowest since March.
Some traders are “unhappy with the fact that the Fed viewed these cuts as being more of a mid-cycle adjustment than the beginning of a new easing cycle,” said Scott Buchta, head of fixed-income strategy at Brean Capital. “Some people were expecting future rate cuts to be on autopilot rather than data-dependent.”
Central bankers voted, with two dissenting, to lower the target range for the benchmark rate by a quarter-percentage point to 2%-2.25%. In their statement, they cited “implications of global developments for the economic outlook as well as muted inflation pressures.”
The market for inflation-linked Treasuries also suggested traders weren’t viewing an insurance cut as sufficient to boost consumer prices toward the Fed’s goal. The five-year breakeven rate, which represents expectations for annual inflation during that period, fell about 4 basis points to 1.55%.
“Powell is selling this cut as an insurance cut,” said Priya Misra, global head of rates strategy at TD Securities. “The market is telling you that it doesn’t believe that insurance cuts will work.”
--With assistance from Katherine Greifeld and Emily Barrett.
To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net
To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Dave Liedtka
©2019 Bloomberg L.P.