Market moves were modest after the Fed released minutes of its last meeting, but the message was clear — the market still fears the Federal Reserve will not be aggressive enough in its rate cutting to save the economy.
Soon after the Fed's 2 p.m. ET release of its minutes, the curve between the 2-year note and the 10-year note flattened. It then briefly inverted later Wednesday afternoon, with the 2-year yield rising above the 10-year yield. That also occurred briefly last week, but did not hold on a closing basis. Other parts of the yield curve have inverted and remain that way, but the 2-year-to-10-year spread is the most widely watched.
Fed Chairman Jerome Powell speaks Friday, and the pressure is on him to clarify the central bank's current stance on policy. Market pros are looking for Powell to resolve a debate within the market, over whether the Fed is going to cut just a few times or is embarking on a longer running rate cutting cycle.
Powell speaks at 10 a.m. ET at the Fed's annual Jackson Hole, Wyoming, symposium.
An inverted yield curve, if it stays inverted for awhile, is considered a strong recession warning.
"Looks like the Fed is going to be stubborn, and the yield curve is starting to price that in," noted Andy Brenner of National Alliance.
The Fed, in the minutes of its last meeting, called its first rate cut in more than a decade a "recalibration," emphasizing it is not on a "pre-set course" for future cuts. The Federal Open Market Committee cut rates by a quarter point on July 31, and following its meeting, Powell called the cut a "midcycle adjustment," a term also used in the meeting minutes.
"If midcyle adjustment is not in the Jackson Hole speech, people will interpret that as opening the door for more cuts as opposed to two or three," said Michael Gapen, chief U.S. economist at Barlcays. Since the Fed's last meeting, bond yields, which move opposite price, have dropped or moved deeper into negative territory.
The U.S. 10-year was at 2.07% ahead of the Fed's last meeting, and was at 1.58% Wednesday afternoon. The 2-year was at about the same rate, but was fluctuating, having hit a high of 1.58%.
"If the FOMC doesn't indicate strong urgency to cut very aggressively, we're back to that world of slowing growth, weak inflation and a Fed that's running the risk of not providing as much support as needed, which is the recipe for yield curve inversion," said Jon Hill, rate strategist at BMO. "However, some of the economic data has shown green shoots ... and there are concerns of financial stability which are reasonable. Cutting this early in the cycle before economic data turns could lead to excessive risk taking."
Fed officials were clearly split on the vote, with two seeking a 50 basis point cut, and several opposing it, including two dissenters. The Fed is expected to cut interest rates by a quarter point at its September meeting.
"This lowers the expectation for Jay Powell on Friday, which could make a dovish tilt more explosive," noted Brenner.
Correction: The yield curve briefly inverted later Wednesday afternoon. An earlier version misstated the day.