The Market Ignores The Fed

On today’s show we are taking another look at interest rates. Global credit markets seem to be at odds with the Federal Reserve’s hawkish statements.

Jerome Powell announced on Wednesday another 0.25% interest rate increase in the federal funds rate. We heard the same messages yesterday that we heard back in December at the last rate increase.

The Fed set forward guidance for another rate increase at the March meeting, while at the same time stating that they are making decisions on a meeting by meeting basis. The terminal rate is forecast to be between 5% and 5.25%.

But the guidance prior to the announcement was already for a 0.25% increase at the Fed 1 meeting. The market had clearly priced that expectation into the market rates. In the day leading up to the announcements, the yield on the 10 year treasury fell even further to 3.415%.

The yield on the 10 year Treasury peaked in early November at 4.2%. Clearly we are in a rising interest rate environment. The Fed increases the rate at each meeting and with the Federal Funds rate in the range of 4.5%-4.75%, you would expect the yield on the longer term bonds to be increasing as well. But that is not the case. What on earth is going on?

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Host: Victor Menasce

email: podcast@victorjm.com