It’s no longer “accommodative,” and so the elevation may be nearing an end. But it’s also a failure, if the two-and-a-half year tightening of monetary policy’s intent was raising long rates and putting the fear of the central banking god into the hearts and minds of the fixed-income set.
The Federal Reserve raised its Fed funds rate 25 basis points yesterday to 4.25%. Gone from its accompanying statement was the word “accommodative,” which has been present in previous statements and was widely considered to be a way of saying that further rate hikes were in the cards to bring the monetary policy closer to a neutral stance.
None of this matters much, if at all, to the bond market. The Fed’s influence on trading in the 10-year Treasury looks virtually nil. Not only did the yield on the benchmark 10-year slip a bit yesterday, the closing ~4.54% yield on Tuesday was a bit lower than when the Fed began hiking rates back in June 2004.
What gives? There are, it seems, more pressing matters for the bond market. Such as? Take your pick. The choices, depending on your thinking, range from expectations of an approaching economic slowdown or recession; a global savings glut that’s keeping long rates artificially low; to an export-driven mania in Asia that channels monies into American bonds regardless of fundamentals, to name but a few. Incoming Fed Ben Bernanke is partial to the global savings glut argument, and presumably that will inform his decisions when he takes the helm of monetary policy next year.
As to the suggestion by the Fed that it’ll soon stop raising short rates, the pundits are buzzing with the possibilities. “Yesterday’s FOMC meeting was a watershed in the sense that it was the first time the Fed left the window open for a pause in this 18-month tightening cycle,” David Rosenberg, Merrill Lynch’s chief North American economist, told MarketWatch.com today.
But before investors bet the ranch on the end of interest-rate hikes, there’s more to digest. For starters, the economy’s still rolling along. As Charles Dumas of Lombard Street Research wrote yesterday in a note to clients, “Psst! Ben: The economy’s booming.” Of course, we’ll have to wait till next year to see if Mr. Bernanke takes the hint.
Meanwhile, yesterday’s trade report for October reminds that there are more than a few hazards lurking in the global economy that may yet conspire to push up interest rates in spite of the best laid plans of central banking’s finest. The consensus expectation called for a trade deficit of $62.8 billion in October, or down from September’s $66.0 billion, according to
http://www.thestreet.com/markets/databank/10256427.html TheStreet.com. But the data surprised with a bigger-than-forecast mountain of red ink totaling a monthly record deficit of $68.9 billion. So much for Christmas gifts.
The news was greeted with shock and awe by forex traders, who’ve been selling the dollar today. The U.S. Dollar Index has dropped sharply since yesterday’s close. The not-so-subtle implication: interest rates must rise to appease anxious currency traders and, more importantly, the large and far-flung club of foreign dollar holders.
“It’s a genuinely bad number,” Jason Daw, a currency strategist in New York at Merrill Lynch & Co., said of the trade report in Bloomberg News story today. “It’s a negative situation for the dollar. We expect the current account widens out through the beginning part of next year.”
The reaction in the 10-year Treasury Note, by contrast, could hardly be more different, or more relaxed. The yield on the benchmark debt security, as we write around noon, is 4.44%, or about ten basis points below yesterday’s close.
The bond market may be smoking what the Fed’s handing out, but we’ll stay on the wagon a while longer, thanks.