The Market Cuts Rates, Figuring Fed Will Follow
Interest rates fell across the board yesterday as investors and traders registered growing confidence that the Federal Reserve will cut rates at its next policymaking session, July 5 and 6.</br></br>The market's expectation that the Fed will lower rates was indicated by yesterdayÛªs drop in bond yieldsÛÓthe largest of which, seven-hundredths of a percentage point, was on five-year U.S. Treasury notes. WhatÛªs more, yields on every type of Treasury security due in five years or less are now below the Fed's current 6 percent target for overnight rates.</br></br>That gapÛÓbetween market rates for Treasuries and the Fed funds rate ÛÓis likely to be a powerful signal to Fed Chairman Alan Greenspan that the market expects a cut.</br></br>Greenspan, who said recently that he does not expect the current period of slow economic growth to turn into a recession, could provide market participants with some clues about his thinking on rates in a speech tonight before the Economic Club of New York. Following the speech, which has been scheduled for several months, he will be questioned by Wall Street economist Henry Kaufman and Martin Davis, president of Wellspring Associates.</br></br>Fed governor Janet Yellen said yesterday in an interview that the market clearly is assuming the Fed will act to cut rates in the next month or two, but she would not say whether the market was right or wrong. The Fed raised short-term rates seven times in the 12 months ended in February, doubling them from 3 percent to 6 percent, in an effort to cool off an overheating economy and hold down inflation.