Treasury prices moved strongly higher today on expectations that the
Federal Reserve will go out and cut interest rates sooner than the March 20 meeting, perhaps as early as later this week. Also motivating the rally was the notable announcement by a Federal Reserve spokesman saying Fed Chairman
Alan Greenspan's testimony to the
House Financial Services Committee
-- which he'll deliver on Wednesday -- will be a revision from his monetary report to the Congress, delivered Feb. 13.
This is an unusual step, and it had analysts thinking the chairman is likely to sound a much less confident note about the economy than he did Feb. 13, when his even-handed testimony seemed to indicate that an intermeeting interest rate cut was an unlikely prospect. Should Greenspan sound more concerned about consumer confidence -- specifically, about the breach of confidence that he says occurs when the economy hits a recession -- the assumption of another rate decrease inside a few days of his speech will increase.
"It would be hard for me to understand if he doesn't talk a little more encouragingly about rate cuts," said Dana Johnson, head of fixed-income strategy at
Bank One
. "It seems to me the kinds of declines we've seen in the equity market and measures of consumer confidence are behaving like the breach of confidence he was so worried about."
Of late, the benchmark 10-year Treasury note was up 11/32 to 99 18/32, with the yield dropping to 5.056%. The two-year note was also stronger, gaining 5/32 to 100 10/32, yielding 4.46%. The 30-year bond rose 16/32 to 98 3/32, yielding 5.447%. Taken with the rally in stocks, the markets are clearly banking on another decrease in
the fed funds rate soon.
Likely to motivate this occurrence would be another sharp decline in the
Consumer Confidence Index, released by the
Conference Board
tomorrow at 10 a.m. EST, as well as lousy results out of tomorrow's 8:30 a.m.
durable goods orders figure and the February
purchasing managers index, which will be released by the
National Association of Purchasing Management
Thursday.
A rate cut coming so close to a scheduled speech from Greenspan seems unusual, even though the markets are hollering about it endlessly. If Greenspan intends to cut rates, it seems more likely that he'd cut before his appearance, rather than being put in position to explain his non-action to members of Congress when he ventures up Capitol Hill Wednesday.
"If he has that information, why not have a conference call late in the day tomorrow or maybe even early on Wednesday and make the change, rather than having to finesse the kinds of questions he usually gets about interest rates," said Jim Kochan, senior fixed-income strategist at
Robert W. Baird
in Milwaukee.
Then again, there's the chance that Greenspan's revised testimony will suffice. The Fed is wary of being perceived as reacting solely to the stock market, and panicked action would seem to indicate that they were following the current market malaise, rather than reacting to economic data (though a triad of poor economic data would provide them with more ammunition for such a move).
What Greenspan is most concerned about, and it's something he addressed in his Jan. 25
speech before the
Senate Budget Committee
, is whether consumer confidence has moved from reacting to a slowing in growth to that period of buying grains and gold bars.
"The crucial issue ... is whether
the marked decline
in production already under way breaches consumer confidence because there is something different about a recession from other times in the economy," Greenspan said. "It is not a continuum from slow growth into negative growth. Something happens."
Economic Indicators
Today's only economic release was the January
existing home sales data, which showed a 6.6% decrease on a seasonally adjusted annual basis. The pace of existing home sales fell to 4.65 million in January from a revised 4.98 million rate in December.
