Traders Stuck Between Two Fed Options After Williams Kerfuffle
(Bloomberg) -- The rollercoaster-ride in markets spurred by comments from Federal Reserve Bank of New York President John Williams has revved up the debate about how big the central bank’s widely expected rate cut this month may be, even as futures are once again leaning slightly toward the smaller option.
Short-end U.S. rates sank late Thursday and futures indicated that a half-point cut at the July 30-31 Fed meeting was seen as more likely than a quarter-point move after Williams said in a speech that it pays to act quickly in times of economic distress.
The resulting rally in Treasuries, which drove two-year yields as low as 1.75%, received additional support from comments by Vice Chairman Richard Clarida. But a later move by the New York Fed to walk back the Williams comments as “academic” spurred a sharp reversal in early Asian trading Friday. Two-year yields rose 4 basis points Friday in New York, to 1.80%.
“Williams was likely surprised the comments were taken so enthusiastically by the market” as an indication of what the Fed will do at its July policy meeting, said Stephen Jen, who runs hedge fund and advisory firm Eurizon SLJ Capital.
Fed funds futures now indicate expectations that policy makers will cut rates by 35 basis points. While that’s just 1 basis point more than was priced in before Williams spoke, and closer to a quarter-point move than a half-point cut, both options are clearly on the table. Traders will now turn their focus to comments later from Eric Rosengren, a Federal Open Market Committee voter who is slated to speak Friday just before the central bank heads into its pre-meeting blackout period.
President Donald Trump took to Twitter again on Friday to renew his criticism of the Fed, complaining that the U.S. is paying “much higher interest rates” than other countries. He also said that he liked Williams’s “first statement much better than his second.”
Bank of America economist Michelle Meyer, in a note to clients, described the episode as a “head fake” and a “debacle.” She said that the New York Fed’s clarification suggests that Williams and Clarida didn’t coordinate to shift the market toward a 50-basis-point cut and that Bank of America is continuing to call for a quarter-point cut.
For Jen, the fact that the New York Fed saw the need to clarify the remarks suggests Williams’s outlook isn’t the Fed’s central view.
“The central mass at the Fed is probably for a 25-basis-points cut and then a wait and see,” he said. “They won’t do a 50-basis-point cut, there is no need for them to do that given the economic backdrop in the U.S.”
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