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US Treasuries bounce, talk Fed will stay measured
Tue Mar 22, 2005 11:16 AM ET
(Recasts, updates prices)
NEW YORK, March 22 (Reuters) - U.S. Treasuries firmed on Tuesday, aided by speculation the Federal Reserve would keep a reference to raising interest rates at a "measured" pace in its post-meeting statement later in the session.
The 10-year Treasury note (US10YT=RR: Quote, Profile, Research) gained 10/32 in price, lowering its yield to 4.49 percent from 4.52 percent late on Monday. Yields remain within the 4.44 percent to 4.57 percent range that has held for the last week or so.
The market fully expects the central bank to raise rates a quarter point to 2.75 percent when its policy meeting ends at 2:15 p.m. EST (1915 GMT). But speculators had been borrowing Treasuries and selling them on a bet the Fed would also drop "measured," opening the door for larger hikes.
"The latest feeling is the Fed will not change the statement in a material way, so bears are getting cold feet," said one trader at a U.S. primary dealer.
"The result was a bout of short-covering, which is no surprise given just how short the market has got recently," he added. The latest JPMorgan client survey showed net short positions at their largest since May last year.
Yields on the two-year note (US2YT=RR: Quote, Profile, Research) dipped to 3.69 percent from 3.72 percent, while those on the five-year note (US5YT=RR: Quote, Profile, Research) eased to 4.14 percent from 4.18 percent.
At the long end, the 30-year bond (US30YT=RR: Quote, Profile, Research) climbed 20/32, lowering yields to 4.79 percent from 4.83 percent.
Bonds got a mild lift from a subdued reading on core U.S. factory gate prices. Core producer prices excluding food and energy rose 0.1 percent, as expected. That was something of a relief to bond bulls stung by inflation worries after January's hefty 0.8 percent gain in core prices.
"The price data were comforting," said Dominic Konstam, head of interest rate strategy at CSFB. "But inflation risk is still in the system and the Fed can't wait for it to be confirmed in the data, so they'll keep on tightening."
Treasuries had gained early after General Motors Corp. (GM.N: Quote, Profile, Research) bonds slid sharply in pre-opening trade. Spreads on GM's huge debt issuance have widened sharply since it issued a profit warning last week, driving nervous investors to seek the relative safety of government debt.
There has even been speculation GM's travails, and the ripple effect in credit markets, could make Fed board members a little less hawkish than they otherwise might be.
That was one reason most analysts doubt the Fed would drop "measured" from its statement. A Reuters poll of primary dealers found 17 of 19 respondents expected the word to be retained. Most also assume the Fed will keep its reference to policy being "accommodative."
"Dropping 'measured' while keeping 'accommodative' would be taken as a warning of larger hikes to come," said CSFB's Konstam. "But dropping both could be taken as a hint of pause, which we seriously doubt the Fed is considering.
"Net, the best bet is they leave both in and use coming speeches to prepare the market for a bigger change later in the year," he added.
Tue Mar 22, 2005 11:16 AM ET
(Recasts, updates prices)
NEW YORK, March 22 (Reuters) - U.S. Treasuries firmed on Tuesday, aided by speculation the Federal Reserve would keep a reference to raising interest rates at a "measured" pace in its post-meeting statement later in the session.
The 10-year Treasury note (US10YT=RR: Quote, Profile, Research) gained 10/32 in price, lowering its yield to 4.49 percent from 4.52 percent late on Monday. Yields remain within the 4.44 percent to 4.57 percent range that has held for the last week or so.
The market fully expects the central bank to raise rates a quarter point to 2.75 percent when its policy meeting ends at 2:15 p.m. EST (1915 GMT). But speculators had been borrowing Treasuries and selling them on a bet the Fed would also drop "measured," opening the door for larger hikes.
"The latest feeling is the Fed will not change the statement in a material way, so bears are getting cold feet," said one trader at a U.S. primary dealer.
"The result was a bout of short-covering, which is no surprise given just how short the market has got recently," he added. The latest JPMorgan client survey showed net short positions at their largest since May last year.
Yields on the two-year note (US2YT=RR: Quote, Profile, Research) dipped to 3.69 percent from 3.72 percent, while those on the five-year note (US5YT=RR: Quote, Profile, Research) eased to 4.14 percent from 4.18 percent.
At the long end, the 30-year bond (US30YT=RR: Quote, Profile, Research) climbed 20/32, lowering yields to 4.79 percent from 4.83 percent.
Bonds got a mild lift from a subdued reading on core U.S. factory gate prices. Core producer prices excluding food and energy rose 0.1 percent, as expected. That was something of a relief to bond bulls stung by inflation worries after January's hefty 0.8 percent gain in core prices.
"The price data were comforting," said Dominic Konstam, head of interest rate strategy at CSFB. "But inflation risk is still in the system and the Fed can't wait for it to be confirmed in the data, so they'll keep on tightening."
Treasuries had gained early after General Motors Corp. (GM.N: Quote, Profile, Research) bonds slid sharply in pre-opening trade. Spreads on GM's huge debt issuance have widened sharply since it issued a profit warning last week, driving nervous investors to seek the relative safety of government debt.
There has even been speculation GM's travails, and the ripple effect in credit markets, could make Fed board members a little less hawkish than they otherwise might be.
That was one reason most analysts doubt the Fed would drop "measured" from its statement. A Reuters poll of primary dealers found 17 of 19 respondents expected the word to be retained. Most also assume the Fed will keep its reference to policy being "accommodative."
"Dropping 'measured' while keeping 'accommodative' would be taken as a warning of larger hikes to come," said CSFB's Konstam. "But dropping both could be taken as a hint of pause, which we seriously doubt the Fed is considering.
"Net, the best bet is they leave both in and use coming speeches to prepare the market for a bigger change later in the year," he added.
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US Treasuries routed, Fed sees inflation pressure
Tue Mar 22, 2005 03:29 PM ET
(Adds Fed statement, reaction, updates prices)
NEW YORK, March 22 (Reuters) - U.S. benchmark Treasury yields shot to their highest level in eight months on Tuesday after the Federal Reserve noted a pick-up in inflation pressures, stirring speculation of faster rate hikes.
As expected, the Fed raised rates 0.25 percentage point to 2.75 percent, the seventh rise since June and the highest rate since late 2001. In its policy statement, the Fed kept a reference to raising rates at a "measured" pace but upgraded its assessment of output to "solid" and added a new sentence noting increased pricing power.
The Fed also qualified its assessment of inflation and growth risks, saying they were balanced only if policy was changed as appropriate.
"Instead of dropping 'measured,' they chose language that acknowledges the modest pick-up in inflation pressures," said William Fitzgerald, head of fixed-income at Nuveen. "This may be a step toward getting rid of 'measured;' of being more aggressive without indicating a change in the plan."
Yields on the 10-year Treasury note (US10YT=RR: Quote, Profile, Research) shot up to 4.61 percent, the highest reading since July, from 4.48 percent just before the Fed's announcement and 4.52 percent late on Monday.
Traders now look for a test of July's peak around 4.64 percent, a break of which could unleash a move toward last year's highs around 4.90 percent.
Yields on the two-year note (US2YT=RR: Quote, Profile, Research) rose to 3.82 percent, their highest level since 2001, from 3.72 percent.
Yields on the five-year note (US5YT=RR: Quote, Profile, Research) jumped to 4.29 percent from 4.18 percent. At the long end, the 30-year bond (US30YT=RR: Quote, Profile, Research) dropped 26/32, lifting yields to 4.89 percent from 4.83 percent.
"The statement was a big surprise. There were a couple of clears signs that the Fed is more worried about inflation and inflation pressure down the pike than in the previous statement," said Alan Ruskin, research director at 4CAST.
"The Fed is now implying that if they tighten policy as appropriate, then price stability would be secured, but not if policy is left accommodative," he added.
Prices in the futures market (0#FF:: Quote, Profile, Research) slid as the market moved to price in the risk that interest rates would rise farther and faster than first thought. The market now has a quarter-point hike priced in for the next four meetings taking rates to 3.75 percent by October.
Earlier, bonds got a mild lift from a subdued reading on core U.S. factory gate prices. Core producer prices excluding food and energy rose 0.1 percent, as expected. That was something of a relief to bond bulls stung by inflation worries after January's hefty 0.8 percent gain in core prices.
"The price data were comforting," said Dominic Konstam, head of interest rate strategy at CSFB. "But inflation risk is still in the system and the Fed can't wait for it to be confirmed in the data, so they'll keep on tightening."
Indeed, there were worries that the Fed's sudden emphasis on inflation in its statement might presage a larger-than-expected rise in the consumer price index, due on Wednesday.
Forecasts were for a 0.2 percent rise in the core CPI, excluding food and energy, but dealers now will be on alert for a higher outcome.
Tue Mar 22, 2005 03:29 PM ET
(Adds Fed statement, reaction, updates prices)
NEW YORK, March 22 (Reuters) - U.S. benchmark Treasury yields shot to their highest level in eight months on Tuesday after the Federal Reserve noted a pick-up in inflation pressures, stirring speculation of faster rate hikes.
As expected, the Fed raised rates 0.25 percentage point to 2.75 percent, the seventh rise since June and the highest rate since late 2001. In its policy statement, the Fed kept a reference to raising rates at a "measured" pace but upgraded its assessment of output to "solid" and added a new sentence noting increased pricing power.
The Fed also qualified its assessment of inflation and growth risks, saying they were balanced only if policy was changed as appropriate.
"Instead of dropping 'measured,' they chose language that acknowledges the modest pick-up in inflation pressures," said William Fitzgerald, head of fixed-income at Nuveen. "This may be a step toward getting rid of 'measured;' of being more aggressive without indicating a change in the plan."
Yields on the 10-year Treasury note (US10YT=RR: Quote, Profile, Research) shot up to 4.61 percent, the highest reading since July, from 4.48 percent just before the Fed's announcement and 4.52 percent late on Monday.
Traders now look for a test of July's peak around 4.64 percent, a break of which could unleash a move toward last year's highs around 4.90 percent.
Yields on the two-year note (US2YT=RR: Quote, Profile, Research) rose to 3.82 percent, their highest level since 2001, from 3.72 percent.
Yields on the five-year note (US5YT=RR: Quote, Profile, Research) jumped to 4.29 percent from 4.18 percent. At the long end, the 30-year bond (US30YT=RR: Quote, Profile, Research) dropped 26/32, lifting yields to 4.89 percent from 4.83 percent.
"The statement was a big surprise. There were a couple of clears signs that the Fed is more worried about inflation and inflation pressure down the pike than in the previous statement," said Alan Ruskin, research director at 4CAST.
"The Fed is now implying that if they tighten policy as appropriate, then price stability would be secured, but not if policy is left accommodative," he added.
Prices in the futures market (0#FF:: Quote, Profile, Research) slid as the market moved to price in the risk that interest rates would rise farther and faster than first thought. The market now has a quarter-point hike priced in for the next four meetings taking rates to 3.75 percent by October.
Earlier, bonds got a mild lift from a subdued reading on core U.S. factory gate prices. Core producer prices excluding food and energy rose 0.1 percent, as expected. That was something of a relief to bond bulls stung by inflation worries after January's hefty 0.8 percent gain in core prices.
"The price data were comforting," said Dominic Konstam, head of interest rate strategy at CSFB. "But inflation risk is still in the system and the Fed can't wait for it to be confirmed in the data, so they'll keep on tightening."
Indeed, there were worries that the Fed's sudden emphasis on inflation in its statement might presage a larger-than-expected rise in the consumer price index, due on Wednesday.
Forecasts were for a 0.2 percent rise in the core CPI, excluding food and energy, but dealers now will be on alert for a higher outcome.
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UPDATE 1-PIMCO boosts position in European bonds
Tue Mar 22, 2005 01:43 PM ET
(Adds name of fund, specifies that increased position is in European corporate debt)
NEW YORK, March 22 (Reuters) - PIMCO, the world's largest bond fund manager, has expanded its holdings of European investment grade corporate debt since the beginning of the year, citing slowing inflation prospects in the euro zone and advancements in pension reform.
The company has increased its position in European bonds to around 15 percent to 20 percent of its investment grade portfolio, up from 10 percent in January, said Mark Kiesel, who oversees PIMCO's Investment Grade Corporate Bond Fund, a $40 billion portfolio of investment grade debt.
Kiesel, a PIMCO executive vice president and portfolio manager, told Reuters that he sees longer-term U.S. bond yields increasingly losing their attractiveness for foreign investors as the U.S. yield curve remains relatively flat.
So foreign investors hedging against currency volatility are likely to start steering clear of long-term U.S. debt, the yields of which have been relatively stable since June of last year when the Federal Reserve began raising short-term rates.
"The advantage of the U.S. bond market has gone away on a (currency) hedged basis," said Kiesel in an interview.
He pointed out that even if the Federal Reserve lifts interest rates by a quarter point, as it is widely expected to do after a meeting Tuesday, 3-month LIBOR still has roughly a 30 basis point premium to the Fed's benchmark federal funds rate.
PIMCO has seen the yield on the benchmark 10-year Treasury note remaining range bound this year between 4 percent and 5 percent, he said. The firm also expects the U.S. economy to grow at an annualized rate of 3 percent in 2005.
Kiesel said PIMCO's outlook was based on a federal funds rate of 3 percent at the end of the year, but he acknowledged the risk to the forecast, saying there was still a possibility the Fed could raise rates more aggressively.
Concerns that General Motors Corp. (GM.N: Quote, Profile, Research) , one of the biggest issuers of corporate debt, will be downgraded to "junk" and cause shifts in asset allocation are so far contained, Kiesel said.
"There is no spillover," he said. "Auto corporates are under pressure, Ford, General Motors and DaimlerChrysler, but not other sectors."
PIMCO, based in Newport Beach, California, has total assets of around $450 billion, an official with the company said. (New York Treasury newsroom 1-646-223-6300)
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Treasuries Fall as Fed Raises Rates, Cites Inflation Pressure
March 22 (Bloomberg) -- U.S. Treasury notes tumbled after the Federal Reserve raised its benchmark interest rate and indicated it is concerned about faster inflation.
The central bank boosted its target for the overnight lending rate between banks to 2.75 percent from 2.5 percent, and said ``pressures on inflation have picked up in recent months.'' It restated a plan to carry out further increases at a ``measured'' pace, a sign to some strategists the Fed may raise rates at each of its six remaining meetings this year.
``What we have here is a Fed that is still going to increase interest rates,'' said Pat Maldari, who is part of a team that invests $185 billion in fixed-income assets for Merrill Lynch & Co.'s investment management unit in Plainsboro, New Jersey. ``The bond market is having a natural reaction to the Fed's statement that inflation risks have increased.''
The benchmark 4 percent note maturing in February 2015 fell about 3/4, or $7.50 per $1,000 face amount, to 95 1/8 at 4 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield rose 10 basis points to 4.62 percent, the highest since July. A basis point is 0.01 percentage point. The note was up 3/8 of a point before the announcement, pushing the yield as low as 4.47 percent.
Yields on shorter-maturity debt, more sensitive to changes in monetary policy, surged to the highest since 2001. The 3/8 percent note maturing in 2007 dropped 3/16 to 99 5/32, the biggest decline since Jan. 4. The yield added 11 basis points to 3.82 percent, and is up from 2.82 percent the day before the Fed started boosting rates on June 30.
Fed Statement
``We did get a change in the Fed's inflation language, and that's something we've been concerned with for some time,'' said Bill Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California and manager of the world's biggest bond fund.
Inflation erodes the value of fixed-income payments. Before today, 10-year note yields exceeded the Fed's measure of inflation by about 2.90 percentage points, compared with an average of about 3.70 percentage points over the past decade, on optimism inflation was in check.
The rate increase was the Fed's seventh since June, and it was expected by all but five of 105 economists polled by Bloomberg. Today's increase brings the target to its highest since just after the Sept. 2001 terrorist attacks, when the central bank cut the rate to 3 percent from 3.5 percent.
``The stance of monetary policy remains accommodative,'' the Federal Open Market Committee said in a statement released after the meeting in Washington. ``Pressures on inflation have picked up in recent months and pricing power is more evident,'' the Fed said. ``The rise in energy prices, however, has not notably Fed through to core consumer prices.''
Inflation Signs
Since the Fed's last meeting on Feb. 2, the government has said its consumer price index excluding food and energy rose 2.3 percent in January from a year earlier, the most since 2002, and oil rose and commodities prices reached the highest since 1980.
A Fed survey released March 9 found companies ``indicated greater ease in passing along price increases'' to consumers. At their last meeting, on Feb. 2, policy makers said inflation expectations were ``well contained.'' The Fed next meets May 3.
``This is a fairly explicit kind of hawkish shift in the economic message,'' said Dominic Konstam, head of interest-rate strategy in New York at Credit Suisse First Boston, one of the 22 primary dealers of U.S. government securities that trade with the Fed. ``They're saying, `Inflation isn't running away from us, but we're going to make sure it doesn't run away by raising rates more than you think.'''
Interest-Rate Futures
Yields on interest-rate futures rose, indicating traders raised expectations for how much more the rate may rise this year. The September Eurodollar futures contract's yield increased 8.5 basis points to 3.99 percent. The contract settles at a three- month lending rate that has averaged 21 basis points higher than the Fed's target over the past 10 years.
Eurodollar futures ``are increasing the chance the Fed raises rates at every single meeting this year'' in quarter-point increments, rather than skipping some meetings, Konstam said.
Treasuries fell in the past month on speculation recent increases in commodity and consumer prices might prompt the Fed to indicate it would raise rates more than investors expected. Treasuries also declined after Fed Chairman Alan Greenspan last month called the decline in 10-year yields since the Fed started raising rates in June a ``conundrum.'' The yield was 4.90 percent in May.
``The `conundrum' was basically a bond market problem and not a problem of monetary policy,'' said David Kelly, an economic adviser for Putnam Investments Inc. in Boston, with more than $200 billion in assets under management.
Investor Focus
Before the decision most investors were focused on whether the Fed would retain the word ``measured.'' A survey of investors late last week by bond-research firm Ried, Thunberg & Co. found 70 percent expected the central bank to again say it can boost rates at a ``measured'' clip.
A Labor Department report today showed wholesale prices, excluding food and energy, gained 0.1 percent in February, compared with a 0.8 percent rise the prior month. Overall producer prices rose 0.4 percent, up from 0.3 percent.
A report tomorrow may show consumer prices climbed 0.3 percent last month, faster than the 0.1 percent increase in January, according to the median estimate of 75 economists in a Bloomberg poll.
Net Shorts
Hedge-fund managers and other large speculators increased their net short positions in 10-year note futures in the week ended March 15, according to U.S. Commodity Futures Trading Commission data on March 18.
Speculative short positions outnumbered long positions by 147,054 contracts on the Chicago Board of Trade, the most since August. Three weeks before, long positions outnumbered short by 86,920 contracts.
Investors who are short have positions that would benefit from a drop in the prices of securities.
Ten-year yields have been little changed on days of the Fed's last five rate increases, rising or falling 3 basis points or less. Yields on two-year notes, which are more sensitive to changes in monetary policy expectations, rose an average 3.6 basis points
-- With reporting by Monica Betran in New York. Editors: Burgess.
March 22 (Bloomberg) -- U.S. Treasury notes tumbled after the Federal Reserve raised its benchmark interest rate and indicated it is concerned about faster inflation.
The central bank boosted its target for the overnight lending rate between banks to 2.75 percent from 2.5 percent, and said ``pressures on inflation have picked up in recent months.'' It restated a plan to carry out further increases at a ``measured'' pace, a sign to some strategists the Fed may raise rates at each of its six remaining meetings this year.
``What we have here is a Fed that is still going to increase interest rates,'' said Pat Maldari, who is part of a team that invests $185 billion in fixed-income assets for Merrill Lynch & Co.'s investment management unit in Plainsboro, New Jersey. ``The bond market is having a natural reaction to the Fed's statement that inflation risks have increased.''
The benchmark 4 percent note maturing in February 2015 fell about 3/4, or $7.50 per $1,000 face amount, to 95 1/8 at 4 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield rose 10 basis points to 4.62 percent, the highest since July. A basis point is 0.01 percentage point. The note was up 3/8 of a point before the announcement, pushing the yield as low as 4.47 percent.
Yields on shorter-maturity debt, more sensitive to changes in monetary policy, surged to the highest since 2001. The 3/8 percent note maturing in 2007 dropped 3/16 to 99 5/32, the biggest decline since Jan. 4. The yield added 11 basis points to 3.82 percent, and is up from 2.82 percent the day before the Fed started boosting rates on June 30.
Fed Statement
``We did get a change in the Fed's inflation language, and that's something we've been concerned with for some time,'' said Bill Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California and manager of the world's biggest bond fund.
Inflation erodes the value of fixed-income payments. Before today, 10-year note yields exceeded the Fed's measure of inflation by about 2.90 percentage points, compared with an average of about 3.70 percentage points over the past decade, on optimism inflation was in check.
The rate increase was the Fed's seventh since June, and it was expected by all but five of 105 economists polled by Bloomberg. Today's increase brings the target to its highest since just after the Sept. 2001 terrorist attacks, when the central bank cut the rate to 3 percent from 3.5 percent.
``The stance of monetary policy remains accommodative,'' the Federal Open Market Committee said in a statement released after the meeting in Washington. ``Pressures on inflation have picked up in recent months and pricing power is more evident,'' the Fed said. ``The rise in energy prices, however, has not notably Fed through to core consumer prices.''
Inflation Signs
Since the Fed's last meeting on Feb. 2, the government has said its consumer price index excluding food and energy rose 2.3 percent in January from a year earlier, the most since 2002, and oil rose and commodities prices reached the highest since 1980.
A Fed survey released March 9 found companies ``indicated greater ease in passing along price increases'' to consumers. At their last meeting, on Feb. 2, policy makers said inflation expectations were ``well contained.'' The Fed next meets May 3.
``This is a fairly explicit kind of hawkish shift in the economic message,'' said Dominic Konstam, head of interest-rate strategy in New York at Credit Suisse First Boston, one of the 22 primary dealers of U.S. government securities that trade with the Fed. ``They're saying, `Inflation isn't running away from us, but we're going to make sure it doesn't run away by raising rates more than you think.'''
Interest-Rate Futures
Yields on interest-rate futures rose, indicating traders raised expectations for how much more the rate may rise this year. The September Eurodollar futures contract's yield increased 8.5 basis points to 3.99 percent. The contract settles at a three- month lending rate that has averaged 21 basis points higher than the Fed's target over the past 10 years.
Eurodollar futures ``are increasing the chance the Fed raises rates at every single meeting this year'' in quarter-point increments, rather than skipping some meetings, Konstam said.
Treasuries fell in the past month on speculation recent increases in commodity and consumer prices might prompt the Fed to indicate it would raise rates more than investors expected. Treasuries also declined after Fed Chairman Alan Greenspan last month called the decline in 10-year yields since the Fed started raising rates in June a ``conundrum.'' The yield was 4.90 percent in May.
``The `conundrum' was basically a bond market problem and not a problem of monetary policy,'' said David Kelly, an economic adviser for Putnam Investments Inc. in Boston, with more than $200 billion in assets under management.
Investor Focus
Before the decision most investors were focused on whether the Fed would retain the word ``measured.'' A survey of investors late last week by bond-research firm Ried, Thunberg & Co. found 70 percent expected the central bank to again say it can boost rates at a ``measured'' clip.
A Labor Department report today showed wholesale prices, excluding food and energy, gained 0.1 percent in February, compared with a 0.8 percent rise the prior month. Overall producer prices rose 0.4 percent, up from 0.3 percent.
A report tomorrow may show consumer prices climbed 0.3 percent last month, faster than the 0.1 percent increase in January, according to the median estimate of 75 economists in a Bloomberg poll.
Net Shorts
Hedge-fund managers and other large speculators increased their net short positions in 10-year note futures in the week ended March 15, according to U.S. Commodity Futures Trading Commission data on March 18.
Speculative short positions outnumbered long positions by 147,054 contracts on the Chicago Board of Trade, the most since August. Three weeks before, long positions outnumbered short by 86,920 contracts.
Investors who are short have positions that would benefit from a drop in the prices of securities.
Ten-year yields have been little changed on days of the Fed's last five rate increases, rising or falling 3 basis points or less. Yields on two-year notes, which are more sensitive to changes in monetary policy expectations, rose an average 3.6 basis points
-- With reporting by Monica Betran in New York. Editors: Burgess.
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livelli sul bund per oggi
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pivot 117.88
s1 117.72
s2 117.39
s3 116.90
,livelli sul bund per oggi
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r1 118.21
pivot 117.88
s1 117.72
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Fed's `Mixed' Message Suggests In-House Debate, Economists Say
March 23 (Bloomberg) -- The Federal Reserve's two-edged message -- that while inflation risks are rising, it needn't yet step up the pace of interest-rate increases -- may reflect disagreements among policy makers that will be clarified in coming weeks, economists and former Fed officials said.
``The language is mixed,'' Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, said in an interview. ``They have told us that their margin for error on inflation has gone down; we don't know by how much.''
The Federal Open Market Committee raised its benchmark rate a quarter-point to 2.75 percent yesterday, the seventh increase in a row. The accompanying policy statement said that while the FOMC still expects ``measured'' rate increases, inflation pressures have picked up. The statement said the committee ``should be'' able to balance economic risks through ``appropriate'' changes in monetary policy.
U.S. stocks and bonds fell on concern the central bank was using the language to lay the groundwork for bigger rate increases, perhaps a 50-basis point boost as soon as June, based on fed funds futures trading. The reverberations were felt globally; in Asia, stocks fell on concern that rate increases will reduce growth in the world's biggest economy.
Two former Fed officials said that the open market committee's qualified word choices are evidence of a collegial split. ``I'm sure there was a debate today over whether they should keep `measured,' and those who wanted to keep it won that debate,'' said Robert McTeer, chancellor of Texas A&M University System and former president of the Fed Bank of Dallas.
Beginning to Worry
``What this statement shows to me is that there is a division within the committee,'' said former Federal Reserve Governor Lyle Gramley, now a consulting economist at the Stanford Washington Research Group in Washington. ``There are some who are beginning to worry about the inflation problem. There are others who aren't convinced yet.''
Policy makers' concerns will be more evident when minutes of yesterday's meeting are released April 12. Other clues may come in speeches they will make between now and the next meeting on May 3.
The statement was ``tough language to negotiate,'' said Stephen Cecchetti, former research director at the New York Fed bank and now a professor at Brandeis University in Waltham, Massachusetts. ``My guess is that there were people who wanted to remove `measured,' and I would think that this is a first step in doing that. We'll have to listen carefully before the next meeting to see whether committee members are leaning in that direction.''
`Measured'
The ``measured'' language is almost certain to leave the statement within the next two meetings, investors said, raising the possibility of a half-point rate increase if prices continue to rise.
``I expect to see the `measured' statement go at the next meeting,'' said John Roberts, managing director and head of government bond trading at Barclays Capital Inc. in New York.
Economists expect a government report today to show that U.S. consumer prices minus food and energy rose 0.2 percent in February for a fifth consecutive month, according to the median estimate in a Bloomberg economist survey.
``They are setting us up for the possibility that they may need to accelerate if they think that the pace of inflation is picking up,'' said Edgar Peters, chief investment officer at PanAgora Asset Management Inc. in Boston. ``They are just getting prepared for that.''
Policy Strategy
Since August 2003, the U.S. central bank has engaged in a self-described ``non-conventional'' policy of using language to set expectations by traders and investors about the path of interest rates. The strategy has supporters among the board of governors, including Fed Chairman Alan Greenspan and Governor Ben Bernanke, while some regional Fed bank presidents remain critical.
Among those opposing the language is William Poole, the St. Louis Fed Bank president, who said in a speech last October that unexpected changes in the economy could cause the Fed to move against the very expectations it was trying to create.
Economists said the central bank may now be less certain about its own inflation forecasts, which predicted the personal consumption expenditures price index, minus food and energy, would rise 1.5 percent to 1.75 percent this year. The reference to inflation in the statement changed from ``relatively low,'' the term used in the February statement, to a more conditional ``contained.''
Inflation Concerns
Since the last Fed meeting, Feb. 1 and 2, crude oil prices surged to an unprecedented $57.60 a barrel, gasoline costs reached a record and the Reuters-CRB index of 17 commodities hit a 24-year high March 16 as copper prices rose to the highest since 1989.
``The Fed has become more concerned about inflation, has raised its core inflation forecast, and is preparing the ground for the possibility of a significant tightening process ahead,'' said Bruce Kasman, head of economic research at J.P. Morgan Securities Inc. in New York.
More aggressive rate increases would also come with a risk for the Fed. Consumers have borrowed heavily against their homes to finance consumption at a time when hourly wages are only keeping pace with inflation. Households are using more of their incomes to fill their gas tanks.
``I would be concerned if I were a floating-rate borrower,'' said Mitchell Hersh, president and chief executive officer of Mack-Cali Realty Corp., a Cranford, New Jersey commercial property company. So far, he said, rate increases have been ``modest, but the trends are clear.''
Passing on Costs
The Fed's so-called beige book regional survey found more manufacturers were able to pass on cost increases to customers, though with only limited effect on consumer prices. The rate and breadth of such pass-through inflation is likely to determine the pace of rate changes going forward, economists said.
By incorporating the term ``measured,'' the Fed may still be betting that the process will proceed slowly.
``People are passing through some price increases because we have been squeezed for so long,'' said William Zadrozny, chief executive officer of Siemens Financial Services, the Iselin, New Jersey, lending unit of Germany's Siemens AG.
March 23 (Bloomberg) -- The Federal Reserve's two-edged message -- that while inflation risks are rising, it needn't yet step up the pace of interest-rate increases -- may reflect disagreements among policy makers that will be clarified in coming weeks, economists and former Fed officials said.
``The language is mixed,'' Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, said in an interview. ``They have told us that their margin for error on inflation has gone down; we don't know by how much.''
The Federal Open Market Committee raised its benchmark rate a quarter-point to 2.75 percent yesterday, the seventh increase in a row. The accompanying policy statement said that while the FOMC still expects ``measured'' rate increases, inflation pressures have picked up. The statement said the committee ``should be'' able to balance economic risks through ``appropriate'' changes in monetary policy.
U.S. stocks and bonds fell on concern the central bank was using the language to lay the groundwork for bigger rate increases, perhaps a 50-basis point boost as soon as June, based on fed funds futures trading. The reverberations were felt globally; in Asia, stocks fell on concern that rate increases will reduce growth in the world's biggest economy.
Two former Fed officials said that the open market committee's qualified word choices are evidence of a collegial split. ``I'm sure there was a debate today over whether they should keep `measured,' and those who wanted to keep it won that debate,'' said Robert McTeer, chancellor of Texas A&M University System and former president of the Fed Bank of Dallas.
Beginning to Worry
``What this statement shows to me is that there is a division within the committee,'' said former Federal Reserve Governor Lyle Gramley, now a consulting economist at the Stanford Washington Research Group in Washington. ``There are some who are beginning to worry about the inflation problem. There are others who aren't convinced yet.''
Policy makers' concerns will be more evident when minutes of yesterday's meeting are released April 12. Other clues may come in speeches they will make between now and the next meeting on May 3.
The statement was ``tough language to negotiate,'' said Stephen Cecchetti, former research director at the New York Fed bank and now a professor at Brandeis University in Waltham, Massachusetts. ``My guess is that there were people who wanted to remove `measured,' and I would think that this is a first step in doing that. We'll have to listen carefully before the next meeting to see whether committee members are leaning in that direction.''
`Measured'
The ``measured'' language is almost certain to leave the statement within the next two meetings, investors said, raising the possibility of a half-point rate increase if prices continue to rise.
``I expect to see the `measured' statement go at the next meeting,'' said John Roberts, managing director and head of government bond trading at Barclays Capital Inc. in New York.
Economists expect a government report today to show that U.S. consumer prices minus food and energy rose 0.2 percent in February for a fifth consecutive month, according to the median estimate in a Bloomberg economist survey.
``They are setting us up for the possibility that they may need to accelerate if they think that the pace of inflation is picking up,'' said Edgar Peters, chief investment officer at PanAgora Asset Management Inc. in Boston. ``They are just getting prepared for that.''
Policy Strategy
Since August 2003, the U.S. central bank has engaged in a self-described ``non-conventional'' policy of using language to set expectations by traders and investors about the path of interest rates. The strategy has supporters among the board of governors, including Fed Chairman Alan Greenspan and Governor Ben Bernanke, while some regional Fed bank presidents remain critical.
Among those opposing the language is William Poole, the St. Louis Fed Bank president, who said in a speech last October that unexpected changes in the economy could cause the Fed to move against the very expectations it was trying to create.
Economists said the central bank may now be less certain about its own inflation forecasts, which predicted the personal consumption expenditures price index, minus food and energy, would rise 1.5 percent to 1.75 percent this year. The reference to inflation in the statement changed from ``relatively low,'' the term used in the February statement, to a more conditional ``contained.''
Inflation Concerns
Since the last Fed meeting, Feb. 1 and 2, crude oil prices surged to an unprecedented $57.60 a barrel, gasoline costs reached a record and the Reuters-CRB index of 17 commodities hit a 24-year high March 16 as copper prices rose to the highest since 1989.
``The Fed has become more concerned about inflation, has raised its core inflation forecast, and is preparing the ground for the possibility of a significant tightening process ahead,'' said Bruce Kasman, head of economic research at J.P. Morgan Securities Inc. in New York.
More aggressive rate increases would also come with a risk for the Fed. Consumers have borrowed heavily against their homes to finance consumption at a time when hourly wages are only keeping pace with inflation. Households are using more of their incomes to fill their gas tanks.
``I would be concerned if I were a floating-rate borrower,'' said Mitchell Hersh, president and chief executive officer of Mack-Cali Realty Corp., a Cranford, New Jersey commercial property company. So far, he said, rate increases have been ``modest, but the trends are clear.''
Passing on Costs
The Fed's so-called beige book regional survey found more manufacturers were able to pass on cost increases to customers, though with only limited effect on consumer prices. The rate and breadth of such pass-through inflation is likely to determine the pace of rate changes going forward, economists said.
By incorporating the term ``measured,'' the Fed may still be betting that the process will proceed slowly.
``People are passing through some price increases because we have been squeezed for so long,'' said William Zadrozny, chief executive officer of Siemens Financial Services, the Iselin, New Jersey, lending unit of Germany's Siemens AG.
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