No commitment from Bernanke for more rate cuts
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Fed Chairman Ben Bernanke’s testimony before Congress today is downbeat on the economy. So where’s the commitment to more interest-rate cuts?
The Treasury bond market doesn’t see one, and that is causing yields on short-term Treasuries to back up sharply. The two-year T-note yield has jumped to 1.94% from 1.80% on Tuesday, and now is the highest since Feb. 27.
Goldman Sachs & Co. economists note in a flash commentary this morning: ‘Despite views that are more downbeat on growth than expected and more relaxed on inflation than expected, there is a conspicuous absence of policy commitment.’
Goldman notes that in recent months the Fed has used codewords or phrases meant to impart that more rate cuts would be forthcoming to bolster the economy. ‘That is missing here,’ the firm says. ‘Instead, [Bernanke] appears to be relying on measures taken to date to be sufficient to do the job.’
The Fed has slashed its benchmark short-term rate from 5.25% in September to the current 2.25%. The most recent cut was a 0.75-point reduction on March 18.
But many investors, particularly those who’ve been buying shorter-term Treasury securities, have been betting on still more Fed cuts.
The Treasury market ‘has done nothing in the last few weeks but overshoot’ to the downside on yields, says Brian Edmonds, head of interest rates at bond dealer Cantor Fitzgerald & Co. in New York. The two-year T-note got as low as 1.46% on March 19.
Edmonds believes the Fed isn’t done: He sees the central bank’s key rate going to 1.5% this year.
Other than maybe the stock market, he says, ‘I just don’t think anyone thinks we’re out of the woods’ with the economy.