Treasuries Pull Back Off Best Levels But Close Modestly Higher

Market trading boards are seen at the Australian Securities Exchange in Sydney, Friday, February 9, 2018. ( AAP Image/Ben Rushton) NO ARCHIVING

After an early move to the upside, treasuries gave back some ground after the Federal Reserve’s monetary policy announcement on Wednesday but remained modestly higher.

A late-day advance helped bond prices to close in positive territory. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, dipped by 2.6 basis points to 1.786 percent.

Treasuries pulled back off their best levels after the Fed revealed its widely expected decision to cut rates by another 25 basis points, lowering the target range for the federal funds rate to 1-3/4 to 2 percent.

The latest rate cut was once again attributed to the implications of global developments for the economic outlook as well as muted inflation pressures.

The accompanying statement was largely unchanged from July, with the Fed reiterating that the labor market remains strong and that economic activity has been rising at a moderate rate.

The Fed did acknowledge in its latest statement that exports have weakened along with business fixed investment, although the central bank noted household spending has been rising at a strong pace.

The decision to cut rates was widely expected by economists but was not without dissent from members of the Federal Open Market Committee.

The FOMC voted 7 to 3 to lower rates by 25 basis points, with St. Louis Fed President James Bullard preferring a 50 basis point cut and Kansas City Fed President Esther George and Boston Fed President Eric Rosengren preferring to leave rates unchanged.

The Fed’s economic projections suggest that the meeting participants are also divided about the outlook for interest rates.

While seven participants expect another rate cut before the end of year, five expect rates to remain unchanged and another five expect rates to be raised back to 2 to 2-1/4 percent.

The central bank reiterated that it will act as appropriate to sustain the economic expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

Today’s modest rate cut was not well received by President Donald Trump, who recently urged the Fed to lower interest rates to zero or less

“Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision! A terrible communicator!” Trump tweeted shortly after the announcement.

Fed Chairman Jerome Powell said in his post-meeting press conference that the central bank is prepared for a more “extensive sequence of rate cuts” in the face of an economic downturn but noted that is not currently expected.

Powell also told reporters that he does not foresee the Fed using negative interest rates as a policy tool, as Trump has suggested.

“If we were to find ourselves at some future date again at the effect of a lower bound, again not something we are expecting, then I think we would look at using large scale asset purchases and forward guidance,” Powell said.

Trading on Thursday may continue to be impacted by reaction to the Fed announcement, although reports on weekly jobless claims, existing home sales and Philadelphia-area manufacturing activity may also attract attention.

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