The Fed Still Follows The Market On Interest Rates Not Vice Versa

We need to put to bed once and for all the notion the Fed is ahead of things and set rates to lead the market. It simply follows the market’s lead…..

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“Davidson” submits:

This history will serve as a good example of how the Fed operates vs. what the Fed says it does. The Fed lets all believe that it has a handle on economic activity, but history disagrees. The Fed’s predictions are so fuzzy because it cannot predict rates, economic activity or even when it expects to raise or lower Fed Funds rates. The market sets rates based on investor sense of pessimism/optimism. If investors turn more positive, rates rise as fixed income is sold to invest in equities. And vice versa.

T-Bills are the ‘canary in the coal mine’. When investors shift safe haven capital to equities, T-Bill rates rise and the Fed follows with a lag whenever T-Bill rates exceed the Effective FFunds rate. Same when rates are falling. It is when T-Bills rise to the point that the T-Bill/10yr Treasury rate spread falls to 0.20% or less that lending shuts down enough to throw the current economic momentum into a major correction.

Rising or falling rates do not indicate improving or worsening liquidity. It is T-Bill/10yr Treasury rate spread which determines liquidity not the level of rates.

T-Bills rise to 1.23% vs. Effective FFunds 1.16%-Fed likely to raise by 0.25% shortly.

Interest Rates

Article by Todd Sullivan, ValuePlays



About the Author

valueplays
Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.