by Bob Stokes
Updated: March 22, 2017
Financial commentators parse every word the Fed utters, hoping to catch a clue about the central bank's next policy decision. But who really determines the direction of rates?
Stay informed. Stay prepared. See what we see ahead for U.S. markets -- now, via this risk-free offer to the Financial Forecast Service.
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[Editor's note: The text version of the video is below.]
Many market observers believe that the Fed determines the trend of interest rates, so they parse every word that Janet Yellen utters, hoping to catch a clue about the next policy decision.
On March 17, a day after the Fed announced a 0.25% hike of its federal funds rate, a CNBC headline quoted a former co-CEO of a major financial firm:
The Fed will lead markets, not follow them
But, if the central bank does lead the market, it'll be a first. History shows that the opposite has always happened.
Even a former Fed chairman says as much. On Sept. 17, 2007, Alan Greenspan was asked by CNBC if he kept “interest rates too low for too long” in 2002-2003, he replied, “the market did.”
Even then, that's what we had been telling our subscribers all along.
Less than three weeks before that Greenspan interview, our September 2007 Elliott Wave Financial Forecast, which published on Aug. 30, 2007, showed this chart and said:
With respect to the timing of the Federal Reserve Board rate cuts, we need to reiterate one key point: The market, not the Fed, sets rates. The chart of the Federal Funds rate (dashed line) and the 3-month U.S. Treasury Bill yield shows how obediently the Fed’s mandated rate follows the lead of the freely-traded T-bill market. … The Fed’s latest effort to stem the retreating financial tide came after T-bill rates had fallen … .
At the time, the federal funds rate was around 5% while Treasury-bill yields had fallen to about 3%. As we know, T-bill yields went on to slide to near zero by around the end of 2008 and the Fed's benchmark rate followed.
You can see how "the Fed follows the market" has played out by looking at this chart from our new, March Elliott Wave Theorist (commentary is below the chart):
Economic performance and the inflation rate have nothing to do with the Fed’s decision. The Fed raised its discount rate for one reason: market rates had risen. The chart makes this dynamic abundantly clear. … As it has amply proved in recent years, the Fed is impotent to force market rates up or down.
We focus on the markets, not the Fed, and the new Theorist is telling subscribers to prepare for a historic move in interest rates.