The FED is Ignoring Reality
We all know that the FED and its interest rate policy is the most important long term factor in the markets. But, this FED has been problematic for many reasons, someone should do an indepth investigation of the 12 Governors and for sure the three or four who have left in the past couple of years.
Why did they keep rates so low for too long, and why are they ignoring what the market is telling them now? My cynical view is that the main thing on their minds is their personal portfolios and it takes time to flip from long to neutral and vice versa (you wouldn’t think that some might be short at this point, but wouldn’t that be an interesting piece?).
I do think that “old think” is the core problem, the belief that the FED’s role is to control the markets rather than provide stability.
So here are three charts that show the picture that we all see at this point.
First is the chart of average market rates, the average of the 30Y, 10Y, 05Y, and 02Y. I like to use the 88 day (4 month) average for interest rate charts. We see here that average rates topped on Nov 4 2022 and the 88 day average topped on January 16, 2023.
The next chart shows the premium or discount of the Fed Funds rate to average market rates. You can note that the premium started on November 10 2022 and has continued on an upward slope since, peaking yesterday.
And then what I like to view as the canary in the interest rate mine, Greenspan’s favorite yield curve measure, the 30 vs 05Y. You will note that the 88 day average bottomed on January 12, 2023.