Do The Federal Reserve Policy Makers Control Interest Rates, or Simply Just Believe That They Do?

David Frost // Additional Articles


December 14  

Current evidence would suggest that the Federal Reserve’s recent policy decision to inject $600 Billion over the next several months into the banking system by purchasing Treasury Bonds seems to be having an opposite effect from what they intended.

Today, on December 14, 2010 the 30-Year Treasury Bond was yielding over 4.5% which is the highest in over seven months, yet we still can’t purchase a CD worth a hill of beans at our local bank, but our borrowing costs are rising like a hot air balloon.  Go figure.

As for the Municipal Bond market, investors have been running for the exits faster than speeding bullet.  Again, not the intention of the fed’s plan. We haven’t seen this type of move in the “usually stable” tax free muni bond market since the crisis took hold in 2008.

Can all this be directly attributed to the Fed?  Not likely, the bond market seems to be telling us something else.  The bond market has always been a great leading indicator of things to come, and right now it’s indicating that the loosey goosy, drop money from helicopters is not going to be the silver bullet this economy needs to resolve itself.

The “so called QE2” policy, thus far is failing to produce results.  The pundits would like you to believe that the money flow is leaving the bond market and landing directly into the equity or stock market.  This remains to be seen.  As stated today by Mr. Bill Gross from Pimco Funds, they are seeing about $5 Billion per week in redemptions from their bond funds, which means the total number throughout the entire market is much larger.  Ask yourself, are we seeing billions of dollars per week entering the stock market?  Doesn’t look that way.  Where is the money going?

It would seem appropriate for the treasury market to find a short term bottom here, which is normally the case when the media takes a story onto the front page of all newspapers and financial websites.  Expect a nice sharp rally in the bond market to begin at any time, but over the longer term, expect rates to move much, much higher in response  to markets being the determining factor of supply and demand, not the federal reserve.

Invest with Vigilance.

About the Author

Trading and investing in markets is second nature to some, but a mystery to others. The goal is to provide a forum where everyday people aspiring to be part time or full time traders will learn how view markets differently and profit beyond their wildest dreams.

David Frost