Bond market says Fed may be too slow to cut rates

Market movements were modest after the release of the minutes of the last Fed meeting, but the message was clear: the market still fears that the Fed is not aggressive enough in its rate cut to save the economy .

Shortly after the 14:00 ET ET publication of its minutes, the curve between the 2-year note and the 10-year note is flattened. It was then briefly reversed Thursday afternoon, the yield over 2 years exceeding that of 10 years. This also happened briefly last week, but did not happen until the end. Other parts of the yield curve have inverted and have remained, but the gap between 2 and 10 years is the most widely followed.

Fed Chairman Jerome Powell will speak on Friday, and the Fed chairman is under pressure to clarify his current policy position. Market professionals are looking for Powell to resolve a debate within the market, whether the Fed will cut its spending a few times or engage in a longer cycle of lower execution rates.

Powell will be speaking at 10:00 am ET at the Fed's annual Jackson Hole Symposium.

An inverted yield curve, if left inverted for a while, is considered a powerful recession warning.

"It looks like the Fed is going to be stubborn and the yield curve is starting to take that into account," said National Alliance's Andy Brenner.

The Fed, in the minutes of its last meeting, called its first rate cut for more than a decade of "recalibration", pointing out that it was not on a "pre-established path" for the future reductions. On July 31, the Federal Open Market Committee cut its rates by a quarter of a point. After its meeting, Fed Chairman Jerome Powell called the reduction "mid-cycle adjustment," a term also used in the minutes of the meeting.

"If Jackson Hole's speech is not moderately adjusted, people will interpret it as an open door to more cuts instead of two or three," said Michael Gapen, chief US economist at Barlcays . Since the last meeting of the Fed, bond yields, whose prices are reversed, have fallen or become more negative.

The 10-year-old US had a 2.07% advance over the last Fed meeting and was 1.58% Wednesday afternoon. The two-year rate was about the same, but fluctuating, peaking at 1.58%.

"If the FOMC does not indicate that it is urgent to reduce its spending very aggressively, we return to this world characterized by a slowdown in growth, low inflation and a Fed that may not provide as much support as needed, which is the recipe for yield reversal of the curve, "said Jon Hill, rate strategist at BMO. "However, some economic data has shown green shoots … and there are reasonable concerns about financial stability." Reducing this date at the beginning of the cycle before economic data is generated could lead to risk taking excessive. "

Fed officials were clearly divided over the vote, two of them wishing for a 50 basis point cut and several opponents, including two dissidents. The Fed is expected to reduce its interest rates by a quarter at its September meeting.

"This reduces expectations for Jay Powell on Friday, which could make a dovish swing more explosive," noted Brenner.