FLASH: The market is leading the Fed Funds rate lower, signaling a rate cut soon.
“We have tracked the Fed’s interest rates decisions for years,” writes Steven Hochberg, Elliot Wave theorist.
In December, he wrote an article titled “Interest Rates Win Again as Fed Follows the Market,” where he observed that although most pundits believe that central banks set interest rates, central banks actually follow the freely traded bond market in their rates decisions.
There he noted that the December federal funds rate hike followed increases in the 3-month and 6-month US T-Bill yields set by the market.
In March, he pointed out that the Fed followed the market again. T-Bill rates had gone sideways since November, and the Fed correspondingly kept the federal funds rate unchanged.
This week, the Fed once again decided to keep the funds rate unchanged. And Mr. Hochberg expect the Fed to change course soon.
The chart above shows the fed funds rate (red line) and the yield on both 3-month and 6-month T-Bills (yellow and green lines, respectively). The latter 2 rates are freely-traded, while the former rate is set by the Fed. Observe the growing gap between the yield on short-term T-Bills and the present fed funds rate. The market is leading the Fed to lower its fed funds rate.
The same behavior occurred in 2007.
By June 18, 2007, the 3-month U.S. T-Bill yield had declined to 4.52% since trending sideways after the Fed raised the fed funds rate to 5.25% in June 2006. The market was leading the Fed to cut rates. The spread between the 2 became even wider, and at its September 2007 meeting, the Fed finally acquiesced to the market and lowered the funds rate from 5.25% to 4.75%. The Fed chased T-Bill rates lower in a series of rate cuts all through 2008, finally dropping the fed funds rate to 0.25% in December 2008.
Meanwhile, the DJIA declined more than 50% during the entire episode, highlighting the central bank’s impotence in controlling markets.
Based on current dynamics, the market is signaling that at some point in the coming months, the Fed will lower its Fed Funds rate to align with T-Bill rates.
Looks like President Trump will get his rate cuts this year.
We will be watching.
By Steven Hochberg
Paul Ebeling, Editor
Editor’s Note: Mr.Hochberg co-edits Elliott Wave International’s Elliott Wave Financial Forecast with Peter Kendall, writes the Short Term Update thrice weekly, and provides commentary on the US stock market, interest rates and precious metals for Global Market Perspective.
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