The Treasury market is down sharply this morning, jacking up the long bond's yield to its highest level in nearly 11 months, following
on the economy and monetary policy. The consensus in the market seems to be that if the April
, scheduled for release tomorrow morning, is strong, the Fed's policymaking arm will adopt an official bias in favor of a higher fed funds rate at its next meeting on May 18.
In the wake of Greenspan's speech at a
Chicago Fed conference, the long bond was lately down 21/32 at 92 25/32, lifting its yield 5 basis points to 5.76%. Its last close above that level was on June 9. The bond is off its worst levels of the day, however. It traded down as much as 30/32 shortly before 10:30 a.m. EDT.
Also significantly, the Treasury bond futures contract traded on the
Chicago Board of Trade
traded below its previously worst level of the year, 119 9/32, reached on March 4, the day before the release of the February employment report.
"He has definitely given some amount of warning" that the
Federal Open Market Committee
might abandon its presumably neutral current stance, said Mark Wanshel, Fed watcher at
. "But I do think it will depend on the data we get tomorrow -- wage trends and so forth."
"He's preparing us for a tightening lean," said Rick Santelli, vice president at
in Chicago. "He's just putting things in such simple terms, talking about 'one-off' events
that have helped keep inflation low." Santelli puts the likelihood of a May 18 bias shift at 65%. The probability that the Fed will avoid tampering with monetary policy during the fourth quarter with Y2K approaching helps those odds, he added. "The third quarter is the likeliest spot for a tightening, and he doesn't want to tighten before he does a lean, so that makes this meeting very critical." After May 18, the FOMC has meetings scheduled for June 29-30 and Aug. 24. The remaining meetings are in October, November and December.
Greenspan's speech had a decidedly bearish cast. For the first time since the Asian economic crisis broke in July 1997, he didn't talk about the risks to the U.S. economy in terms indicating that he sees them as roughly balanced between higher inflation and slower growth. Instead, he emphasized the risk of higher inflation.
In the remark Santelli referenced, Greenspan discussed the role of dropping oil and import prices in last year's decline in inflation, characterizing them as temporary. "The decline in prices of oil and non-oil imports are clearly 'one-off' events," he said.
And while the Fed chief paid homage to rising productivity as the other major factor behind the benign inflation picture, he showed reluctance to embrace the idea that technology-driven productivity gains will continue indefinitely to keep prices stable even as the unemployment rate -- currently 4.2%, a 29-year low -- keeps dropping.
"At some point," he said, "labor market conditions can become so tight that the rise in nominal wages will start increasingly outpacing the gains in labor productivity, and prices inevitably will then eventually begin to accelerate."