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April 12, 2005
A little irony in the market response to the FOMC minutes
A quote from the minutes:
They also noted that the language had not precluded a notable increase in medium- and longer-term interest rates over the intermeeting period as markets extended the expected gradual increase in policy rates.
On the release of the minutes, the 10 year yield shed about 8 basis points almost immediately.
So what does all this mean? In a way, it looks like it's back to business as usual, but perhaps with a bit more clarity as we go forward to the next meeting. But let's go back to March 23, when I said:
If you haven't guessed by now, the thing that still puzzles me the most about Tuesday's events is why the bond market reacted so suddenly, so negatively to news that was not really news. What motivated traders to hold on to the 10-year until 2:15pm EST yesterday? If "measured" isn't that significant, and if the Fed is committed to keeping inflation at bay, and if we all knew that price pressures are building based on previous information, why did they wait for the statement to move?
Truth be told, the bond market did make it back to where it was right before the meeting within a few days. At the close today, the 10 year yield is down to the level of early March, around 4.35%. The 10 year, at least, has gained back all of what was lost on March 22nd and then some (which adds to the irony of my opening comment). I feel vindicated. I think I was right to be puzzled.
In the end, I think that the release of the minutes today did a lot of good. It brings some clarity to the situation. Some of the FOMC members were concerned, as the minutes confirm, about the continued use of the term "measured pace." But given the latest employment data and the general economic picture right now, those words might be with us for another few weeks--or at least until they can come up with something better.
At the close of the market today, the market feels like inflation really is contained, but some pressures are there. And if employment costs start to rise or other price pressures emerge, the Fed will act quickly, perhaps even with a 50 b.p. hike--but only if necessary. No need to dump those bonds yet.
And so, at the end of the day, 10 year yields are at the levels they were in early March, well ahead of the last FOMC meeting. The yield curve is flattening again.
Greenspan's "conundrum" is back. This story isn't over yet.
Along those lines, here's a CNN article that suggests the bond market might be in denial.
Thoughts?
Posted by William Polley at April 12, 2005 3:56 PM
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