We keep hearing how interest rates keep going up. After all, the Fed, in meeting after meeting, keep pushing them higher.
This is taking its toll on automobile sales, housing, and, ultimately, the economy. After all the Fed, according to many, is this magical entity that can push a few buttons and maneuver the economy as it sees fit.
A lot of this is blamed on the "money printing". Throughout my work I repeatedly show how people are truly absent when it comes to knowing about currency creation. Most of the gold bugs and Bitcoin maxis have monetary beliefs that are based upon nonsense. The reality is the Fed does NOT print USD. Of course, understanding the monetary system requires some effort.
There is also a lot of misunderstanding about interest rates. Why are some able to forecast what is going to happen? For example, we started to discuss how things were going to sour as early as Q1 of 2022. This was after inventory levels started to increase at record rates yet we were told how strong the economy was.
Next we have the investion of the LIBOR (now SOFR) yield curve. This was followed by US Treasuries doing the same.
Inflation went from transitory to a major problem. Central banks kicked into action, about the same time when the CPI and other indicators were peaking.
Of course, the magical touch is crap. In this article we will expose some of the foolishness that is often put forth, mostly by the talking heads on television (many whom are economists) and the central bankers themselves.
We are told the Fed controls interest rates. The last 13 months say nothing but increase after increase. This is pushing up the cost of everything.
To believe this means that one completely ignores the power of markets. In fact, you have to believe the Fed is more powerful than the $120 trillion bond market.
When we frame it from this perspective, that is insane.
So what is going on with interest rates. The Fed wants to slow the economy so it will keep raising. The problem is the market has taken a different approach.
Let us look at mortgage rates. We will use the 30 year as an example.
Notice something?
In spite of the Fed continuing to raise rates at every FOMC meeting, mortgage rates peaked last Fall. Regardless of what the central bank is doing, the market said enough. Since that time, we saw a decrease of roughly 50 bps since the peak. This small in comparison to the run up however it is occurring in the face of the Fed pushing things higher.
So people talk about how the Fed is killing housing. The challenge with this view is that, from an interest rate perspective, the worst is over. Things have improved since last November.
Yet still, people are worried about what the Fed is doing. They are, after all, in full control...except when they are not.
The spread between the 3 month and 10 year Treasury is important.
When looking at indicators, the Fed uses the near term forward spread (NTFS). This compares the 3 month bill to the calculated forward rate, 18 months out. It is something Powell alluded to in front of Congress last year.
This metric tracks closely with the 3m10s. The spread between these tracks closely to what Powell was referring to.
This week, it hit a negate 175 bps, a level not seen since 1981. And yet the Fed claims everything is going well.
Even now, at the close of today, this is what we see (from CNBC):
We are looking at a -166 bps spread between the two. That means it pays 166 basis points less to lock your money up for 10 years as compared to 3 months.
But do not worry, the Fed has it covered. They are in control after all. The market has no say in this.
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