On today’s show we are taking a look at interest rates. Yesterday the Federal Reserve increased the Federal Funds rate to a range between 5.25%-5.5%.
This clearly sets the stage for short term interest rates to increase. The yield on the 10 year treasury decreased from 3.91% to 3.86% following the Fed announcement.
The yield on the 30 day Tbill is currently 5.46%. This is matching the Fed funds rate.
Back in October of 2022 the 30 day T-Bill yield was ranging between 2.85% and 3.75% as the Fed was aggressively increasing rates during that period. The yield on the 10 year Treasury at that time was 4.25%. The interest rate that most investor care about is linked to the yield on the 10 year Treasury.
Today we have an interest rate inversion where the market is clearly signalling to the Fed that they don’t believe them.
The real question is what’s next?
We are seeing deflationary prices. We have a globally synchronized economic cycle.
The Fed says it is raising rates, and the European Central Bank says it is raising rates. But as we have discussed on this show before, we have not seen a dramatic rise in bond rates over the past 8-9 months. Since most long term lending is indexed to the yield on the 10-year or the 30 year bond, these numbers have hardly moved since October.
If you listen to the rhetoric from the Fed Chairman, you would think they have tremendous influence over the market.
The market sets the rates, not the Fed Open Market Committee.
In Europe, we are seeing demand for credit falling. This is not being driven by rate increases. The reason we know that is that rates have hardly increased. So that cannot be the reason. Businesses are not going to stop borrowing money for a couple of percentage points if they have things to do that will drive business growth. We went from 0% to 2% in Europe. That’s not enough to choke off business activity. There must be another explanation.
These are deflation and recessionary markers that are consistent with an economic cycle.
Rates rise when there is a competition for money. Rates fall when there is a lack of demand for money. When we talk about money markets, this is an accurate term in the true sense of the word “market”. Just like the price of tomatoes or gold or oil, if demand goes up and exceeds supply, the price goes up. If demand falls, then prices fall. It’s the same thing with money. If demand for money goes up, then interest rates rise. Regardless what the Fed says about rates, we see supply and demand forces are dominating the cost of money over the longer term.