12:58 PM
FED TALK: Fed Vice Chairman Roger Ferguson said it is "difficult to determine how large the overhangs of capital might be at present" but "they seem likely to exert at least a modest amount of drag on the economy over the near term, even as growth picks up." The capital overhang factors into the Fed's thinking through the risk it might pose to the intermediate-term economic outlook. He said it is "too early to say definitively that the current period of subpar growth has ended" despite the Fed's aggressive easing in the first half. Noting that some have wondered about the ability of Fed rate cuts to spur business investment and thus the economy in the current environment, Ferguson said "it would be a mistake to focus on only one channel of monetary influence, such as the impact that policy might have on the demand for high-tech equipment." He added that "monetary policy works on a wide variety of spending, including housing, consumption expenditures, and net exports, and the channels through which policy works range broadly across the financial markets. Just as in the past, an easing of policy is likely, over time, to provide impetus to growth of demand in the aggregate, even if it does not immediately lift the prospects of the hard-pressed firms in some high-tech industries." Here is a link to his speech.
September Fed Fund futures contract now pricing in an 88% chance of a 25 basis point rate cut at the Aug. 21 FOMC meeting. The increased likelihood of additional rate cuts and a renewed decline in Treasury yields has spurred buying by portfolio managers and talk of mortgage-related buying as well.
12:32 PM
FED TALK: Fed Chairman Greenspan, noting his comment in February about the risk of breaching the fabric of consumer confidence, said that has happend. In fact, he is "far less concerned" about such a breakdown in confidence. Greenspan said if he had to make a forecast, he would expect the economy to improve "towards the end of this year" and "clearly so next year."
12:11 PM
The dollar has lost ground against both the euro and yen today on concerns about the U.S. dollar policy. President Bush, in a roundtable interview with the foreign press on Tuesday, said: "The dollar is what it is based upon market. And the reason I say that is our government will not artificially enter markets. The market decides the strength of the dollar. And I would urge other countries, now, to do the same thing." Later, he says: "A strong dollar has got, obviously, benefits and problems for us. One, it's harder to export, but it also helps attract capital. And much of our economy relies upon investors investing in the U.S. because of the dollar. And so we understand the pluses and minuses and, therefore, let the market determine the float of the dollar. I don't know if that answered your question properly." A Treasury official confirmed today that the dollar policy is unchanged, but manufacturers and farm groups continue to push for a softer dollar. As a result, the euro has climbed about 1.3% vs. the dollar today to its highest level since May 22. The dollar is also down about 0.5% vs. the yen.
11:46 AM
FED TALK: Greenspan Q&A continues but so far there has been little new to move the market. He noted that "we are seeing signs that the bottom is beginning" in the economy and that the "rate of deterioration" is "slowing very clearly." But "there are clearly risks of a number of things that could go wrong." He reiterates that he sees little sign of inflation. He said the U.S. budget outlook depends on productivity continuing to increase at a faster pace than it did in the 20 years prior to 1995 but that he sees "no evidence to suggest...that the numbers being used by (the Office of Management and Budget or the Congression Budget Office) for long-term projections have been compromised in a significant way." He predicted second-quarter productivity would reverse some of the decline seen in the first quarter.
10:58 AM
FED TALK: Greenspan on Argentina: The risk of contagion is "not very large at this particular point" and "I don't expect it to become large."
10:40 AM
The yield curve has steepened as two-year notes outperform in the wake of Fed Chairman Greenspan's congressional testimony. The 2/30 yield spread has widened by about 4 basis points to 156 basis points. Over the last month, the spread has ranged from 146 basis points to around 174 basis points, putting the midpoint of the range at about 160 basis points. In other words, it appears market expectations were leaning toward Greenspan's testimony being less dovish than his comments have been interpreted to be. His congressional testimony is supposed to reflect the views of the Fed as a whole. Considering the division within the Fed, Greenspan's suggestion that he is willing to cut rates further if necessary put him firmly in the dovish camp, which is what really matters when it comes to Fed expectations. As a result, two-year yields have outperformed as easing expectations have risen, and the yield curve has steepened back toward to the middle of its recent range.
10:28 AM
FED TALK: Fed Fund futures have now begun to price in higher easing odds as a result of Fed Chairman Greenspan's comments that the Fed might need to cut rates again. Greenspan recites what he calls a "litany" of risks to the economic outlook while also noting the substantial easing already in the pipeline and upcoming fiscal stimulus. The September Fed Fund futures contract is trading at 3.545%, down from 3.575% late Tuesday. At that level, the contract is pricing in about an 80% to 85% chance of a 25 basis point rate cut at the Aug. 21 FOMC meeting, up from a 70% chance at Tuesday's close. Back-month contracts are also pricing in a small possibility of additional rate cuts after that, which had not previously been expected. The November contract, for example, is not pricing in a rate of 3.46%, down from 3.51% yesterday.
10:04 AM
FED TALK: Fed Chairman Alan Greenspan said risks to the economy will remain tilted toward weakness "until we see more concrete evidence that the adjustments of inventories and capital spending are well along." He said the Fed slowed its pace of rate cuts to 25 basis points in June "because we recognized that the effects of policy actions are felt with a lag, and, with our cumulative 2-3/4 percentage points of easing this year, we have moved a considerable distance in the direction of monetary stimulus." He added that "should conditions warrant, we may need to ease further, but we must not lose sight of the prerequisite of longer-run price stability for realizing the economy's full growth potential over time." This is about what the market was expecting from the Fed chairman, and there has been little immediate reaction in Treasuries or Fed Fund futures to Greenspan's comments. Later in the speech, Greenspan notes that recent economic data "have turned from persistently negative to more mixed." He adds that "sub-par" economic performance could continue and reiterates that "we are not free of the risk that economic weakness will be greater than currently anticipated, and require further policy response." He said that weakness could arise from softer demand overseas as well as from domestic developments. "But we need also to be aware that our front-loaded policy actions this year coupled with the tax cuts under way should be increasingly affecting economic activity as the year progresses." Regarding inflation, Greenspan noted that energy prices are moving lower and easing in the labor market should damp wage increases, meaning "overall prices seem likely to be contained in the period ahead." |
