Fed Message Reinforces Dovish Market Tilt, Tipping Yields Lower

(Bloomberg) -- The market took the Federal Reserve’s message Wednesday as fresh evidence of its dovish leanings, with traders gaining confidence that the next move will be a cut late this year.

While the Fed’s statement offered nothing much new for investors, Treasury yields extended their declines to toward multimonth lows, taking the 10-year to 1.59%, and traders ramped up their bets on a rate cut by November’s meeting. That fed funds futures contract now implies the Fed’s target policy rate will be 1.28%, roughly two basis points lower than earlier in the day. The dollar traded little changed after an initial slide.

The impetus for the rallies came as Chairman Jerome Powell addressed reporters, emphasizing that policy makers “are not comfortable with inflation running persistently below our 2% objective.” His remarks were to elaborate on the Fed statement’s reference to the current stance of monetary policy as appropriate to support “inflation returning to the committee’s symmetric 2% objective.”

The chairman’s clarification “speaks to the Fed not being happy with where inflation is,” said Jason Ware, managing director and head of institutional trading at 280 Securities in San Francisco.

“The market is interpreting it as an inflation rate cut, but in my opinion we’re going to stay right where we are at: on hold because policy is already pretty accommodative.”

Later in the press conference, Powell also referred to the risks surrounding the spread of the coronavirus, which has helped drive more buying of Treasuries this month. Policy makers will be “very carefully monitoring” the situation, he said.

The central bank voted at this meeting to keep its policy rate on hold at 1.50%-1.75%, which came as no surprise to the market. Powell also said policy makers expect reserves in the financial system to reach “ample levels” in the second quarter, and the central bank will then aim to slow its pace of T-bill purchases, which is currently running at $60 billion a month.

--With assistance from Vivien Lou Chen.

To contact the reporter on this story: Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Debarati Roy, Mark Tannenbaum

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