Fed Gets Opposite Response It Wanted: Inversions Strengthen

Counting the FF Rate, the yield curve flattened quite a bit but inversions between 3-month and long end widened.

In its policy decision today, the Fed was hoping to steepen the long end of the yield curve. The opposite happened as rates at the long end fell.

Note: The Effective Fed Funds rate will not be available until tomorrow. I estimate it to be 2.15 % down from 2.40% yesterday.

Interest Rate Spreads After the FOMC Announcement

Arrows indicate inversions.

In the following chart, I pay particular attention to the inversion between the 10-year note and the 3-month note.

Interest Rate Spreads Prior to FOMC Announcement

The spread between the 10-year note and the 3-month bill was a mere -1.3 basis points ahead of the announcement. It is now -7.1 basis points.

So much for the notion a rate cut would steepen the curve.

Yield Curve Following Decision

Following the decision the Rate Cut Odds Shrank Dramatically.

I don't buy it. This is a recessionary reaction.

Expect more cuts than are priced in.

The bond market does not believe Powell's "Mid-Cycle" Adjustment speech following the announcement and neither do I.

Mike "Mish" Shedlock

Comments (22)
No. 1-8
ZZR600
ZZR600

technical question: if gold is rising in tandem with negative yielding bonds, what happens if bonds start to behave more normally and yields normalise?

Tater-Man
Tater-Man

HA HA!!

The Fed's new mandate is to keep interest rates as low as possible to allow Congress to keep spending money it will never pay back, while keeping rates high enough to attract suckers... I mean patriotic suckers... to keep playing along for awhile.

Everything turned out EXACTLY as planned.

Unfortunately, the money center banks are still zombies, still have no profitable business model, and will not be able to prop up Congressional spending.

Ditto Deutche Bank propping up Germany and the EU...

Ditto Sumitomo propping up Japan...

Pretty much the story all over the G7, we are seeing the same thing. Piles of empty political promises that were never funded and cannot be paid -- ergo they won't be paid.

$blankman
$blankman

If the economy can’t run on ± 2.5% interest rates, the problem is not the interest rates. But looking for short-term “juice” is easier than peering into underlying problems in the real economy.

Jackula
Jackula

and neither did the stock markets...

KidHorn
KidHorn

The markets were expecting a 0.5 cut, so when they only got 0.25, it was viewed as a 0.25 hike. Forward guidance didn't help either.