be_ixf;ym_201909 d_21; ct_50

Select Page

Has the Fed Lost Control of Interest Rates?

Has the Fed Lost Control of Interest Rates?

Federal Reserve officials head for their meeting in Washington this week, and traders expect them to raise short-term interest rates. This will be the Fed’s fourth rate hike since 2015. But the Fed appears to be pushing on a string when it comes to long-term rates. The interest rate on 10-year Treasury notes has fallen from 2.3% to 2.2% since the Fed began raising rates. It’s a small change, but it’s in the opposite direction of the Fed’s policy.

In fact, as the chart below shows, 10-year yields have fallen every time the Fed has acted. The fed funds rate is shown at the bottom of the chart in blue. The black line tracks 10-year yields. Vertical lines show the day the Fed raised rates.

We expect 10-year yields to move higher when the Fed raises short-term interest rates. But nothing seems to be normal in the current economy.

In a normal economy, we would expect 10-year yields to move higher when the Fed raises short-term rates. But in the current economy. The Fed is raising short-term rates, and traders are lowering long-term rates. Traders seem to be acting more rationally than the Fed.

Raising short-term rates is a traditional response to inflation. Without inflation, the Fed seems to be raising rates just so it can cut them in the next recession. In other words, it’s raising rates just so it has something to do at the meetings.

Long-term rates are set by the market. Pension funds and other institutions tend to be the biggest buyers of bonds. They need to hold bonds to be sure they have money available to meet their financial obligations. Their demand for bonds is keeping long-term rates low. Since their demand is set by demographic trends, there seems to be nothing the Fed can do. Demographics, such as aging baby boomers expecting pension checks, are already locked in stone.

This divergence in interest rates is another indication that investors are in a new environment. Old rules might still apply, but new rules are moving markets. For now, it’s important to remember that there is no alternative to stocks.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader

About The Author

Michael Carr, CMT, CFTe

Michael Carr is an American investor, a Chartered Market Technician (CMT) and a contributing editor for Sovereign Investor Daily. He is a longtime member of the Market Technicians Association (MTA), where he serves as the editor of its newsletter, “Technically Speaking.” He is also a contributor to various publications related to trading, including the Journal of Technical Analysis, MoneyShow, SFO Magazine and Futures Magazine. Michael is the author of two books, Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing (2008) and Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends (2010).

MEET OUR EXPERTS

WHAT READERS ARE SAYING..

I am up $20,070 in closed positions from Feb. 18 through March 7.

- Bob Rowe

I started your system in December … I am ahead $29,000 … I put total faith in you and your system and it has worked for me very nicely. Thanks again I sure like your humble approach about this whole thing

- Dale Leiffer

I have made a little over $4,000 while being cautious.

- Chuck Goss

Share This