Yields rise as size of expected Fed rate cut in focus

NEW YORK: US Treasury yields rose on Friday as investors evaluated comments from two influential Federal Reserve officials on Thursday, which increased expectations that the US central bank may cut its benchmark interest rate by more than previously expected when it meets this month.

John Williams, vice chairman of the Fed's rate-setting committee and head of the regional Fed bank in New York, said when rates and inflation are low, policymakers cannot afford to keep their "powder dry" and wait for potential economic problems to materialize.

With a rate cut at the US central bank's meeting on July 30-31 seen as certain, traders saw a 50-basis-point cut as more likely than a 25-basis-point one in the aftermath of Williams' comments.

"The question is, with the timing of it so close to the beginning of the blackout period, was he trying to express what his argument will be going into the meeting?" said Lou Brien, a market strategist at DRW Trading in Chicago.

Fed officials are unable to speak publically for a set period before each Fed meeting.

The odds of a 50-basis-point cut fell after the New York Fed said later on Thursday that Williams' speech was not about potential actions at this month's meeting.

"Even though the New York Fed overnight said this is academic, don't take this as any kind of near-term signal, the market gave back a little bit of that expectation but not all of it," Brien said. The question is now, "whether he thinks aggressive is just going 25 (bps) when the data is such that you have a low unemployment rate and reasonable GDP etc, or if aggressive to him means 50 (bps), which is what the market was kind of pricing in."

Interest rate futures traders on Friday are pricing for a 59 percent chance of a 25-basis-point cut and a 41 percent probability of a 50 basis-point-rate decrease, according to the CME Group's FedWatch tool.

Fed Board of Governors Vice Chair Richard Clarida also said on Thursday that policymakers might need to act early to stimulate the US economy as an insurance policy against rising risks.

In recent weeks, Fed policymakers have identified a host of economic concerns, including the prolonged US-China trade war, which is denting business confidence; a global manufacturing slowdown; and inflation below the Fed's target of 2% a year.