Treasurys Rally As Fed Cuts Rates

The Associated Press
Tuesday, December 11, 2007; 5:44 PM

NEW YORK -- Treasury prices rallied Tuesday after the Federal Reserve lowered the federal funds and discount rates while sending a vague signal that more rate cuts are an option.

The Fed lowered its fed funds overnight target by 0.25 percentage point to 4.25 percent and also reduced the discount rate, which is charged to commercial banks that borrow directly from the central bank, by 0.25 percentage point to 4.75 percent.

The action was broadly in line with market expectations, given that the credit markets have been fragile and in need of stimulation due to continuing impact from defaults on low-quality mortgage assets.

Some investors had expected a heftier 0.50 percentage point cut in the rates. Still, bond investors were pleased to see the bank cheapen the price of money because that will stimulate the troubled credit markets. However, stock prices plummeted after the announcement because many equity investors had thought a bigger cut was a near certainty.

The Fed's monetary policy statement made clear that the central bank is concerned about both increasing economic uncertainty and the pace of inflation. The Fed removed a statement that was included in the prior communiques stating that risks to the economy are balanced. Yet it made clear that it would monitor inflation carefully.

"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending," the Fed policy makers wrote.

"Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time."

The fact that the central bank is concerned about weak growth indicates more rate cuts are possible in 2008. Yet the Fed's suggestion that the three rate cuts seen in late 2007 will suffice makes those prospects seem remote.

Rich Berg, chief executive officer of Performance Trust Capital Partners, described the Fed statement as "lukewarm."

"All the Fed is really doing is saying that it is paying attention to your pain and that it will keep moving along until it is less painful," Berg said. "This looks like a way to buy more time and hope that the financial system will work out its own kinks."

The price on the benchmark 10-year Treasury note rose 1 7/32 to 102 1/32 with a yield of 4.00 percent, down from 4.16 percent late Monday. Prices and yields move in opposite directions.

The 30-year long bond gained 2 2/32 to 108 9/32 with a yield of 4.49 percent, down from 4.62 percent Monday.

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