New message to markets from the Fed: Calm down a bit

Central bankers have been busy over the last 24 hours trying to fine-tune markets’ expectations for interest rates.

The gist of their revised message: "We aren’t expecting to boost rates aggressively anytime soon." That is helping to pull government bond yields down modestly today after their recent surge.

Federal Reserve and European Central Bank officials have been talking tough on inflation for weeks, strongly hinting that they would tighten credit sooner than later to combat rising price pressures.

But they now appear to think that they put too much of a fear factor into financial markets, particularly in light of the fragile state of the U.S. economy.

The Wall Street Journal’s lead story today carries the headline, "Fed Mood Tilts Away from Rate Increase." It says the Fed could consider raising its benchmark short-term rate (now 2%) in August, but that policymakers would prefer to wait until fall.

Reuters has a good story here that wraps in the Fed’s attempt to calm markets and similar efforts on Tuesday by the ECB and the Bank of England.

The suddenly less hawkish tone on interest rates is bringing buyers into the Treasury bond market today. The two-year T-note yield fell to 2.92% by about 9:30 a.m. PDT, from 3.04% on Monday. The yield has jumped from 2.38% on June 6.

Not that the inflation news was cheery today: The Labor Department said its wholesale inflation gauge (the producer price index) soared 1.4% in May, the biggest rise since November, stoked as usual by surging food and energy costs.

The core inflation rate, excluding food and energy, was up 0.2% in May. While that looked tame enough, Bank of America Economist Peter Kretzmer notes that the 12-month change through May was 3% -- the highest core wholesale inflation rate since 1991.

Longer-term bond yields, which are highly sensitive to inflation expectations, remain sticky today. The 30-year T-bond yield is holding at about 4.78%, compared with 4.79% on Monday.