Here’s What Really Sets Interest Rates (Not Central Banks)

See “powerful evidence that the Fed is not in control of interest rates”

by Bob Stokes
Updated: September 30, 2021

Most everyone is familiar with the phrase: "Keep your eye on the ball," which of course means -- focus on what really matters.

Those who seek clues about the direction of interest rates believe the "ball" is their nation's central bank.

For example, in the U.S., Federal Reserve announcements are the subject of countless financial headlines, like this one from Sept. 22 (Reuters):

Fed signals bond-buying taper coming 'soon,' rate hike next year

The assumption in most of these headlines is that the central bank determines the direction of rates.

However, if interest-rate observers kept their eye on what really matters, they'd be watching the bond market instead of the central bank. In other words, markets lead and central banks follow.

Sticking with the U.S., this chart and commentary from Robert Prechter's 2017 book, The Socionomic Theory of Finance, provide elaboration:


[The chart] plots T-bill rates and the effective federal funds rate (a weighted average of the federal funds rate across all banking transactions) from 1978 to 1984. T-bill rates peaked four times in 1980-1982. Each of those peaks occurred a month or more before subsequent and reactive peaks in the federal funds rate. The Fed's rate also lags at bottoms, as depicted on the chart at the lows of 1980, 1981 and 1982-3.

The book adds:

That interest rates were in a relentless upward trend during the entire decade of the 1970s and that they have been stuck at zero since 2008--in both cases despite the Federal Reserve's contrary desires--is powerful evidence reinforcing the point that the Fed is not in control of interest rates.

The same principle holds in other nations, like Australia or the United Kingdom.

Here's another chart and additional commentary from The Socionomic Theory of Finance:


[The chart] plots interest rates on the U.K.'s freely-traded, 3-month government bond against the Bank of England's (BOE's) official daily bank-lending rate. These lines show that the BOE's rate-setting actions have lagged the freely traded debt market at all twelve major turning points in rates since 1993. The lags vary from two to nine months, and the average lag is 4.8 months.

The major takeaway is that central banks' interest-rate decisions are not proactive but reactive.

Learn what markets themselves are suggesting is next for rates (as well as bond yields and bond prices) in the 50+ virtual pages of our latest monthly Global Market Perspective.

Just follow the link below.

Most Global Investors Will Be Unprepared for a Bear Market...

...If history is a guide.

Please read this quote from an Elliott Wave Theorist:

Profits may accrue to many investors in one-way trends, but over a complete cycle from low to high to low, nearly everyone loses money. Why does it happen?

Written over 100 years ago, One-Way Pockets offers the first researched study of financial-market psychology. A stock broker wondered why his clients lost money over a full cycle in the stock market. After all, he reasoned, if stocks were back near the same level they started, shouldn't his clients have broken even? The pseudonymous Guyon studied his clients' activity statements and found a consistent psychological change among them that explained the losses: At bottoms, they were short term buyers, whereas at tops, they were long term buyers.

Remember, the collective psychology of investors around the world is patterned.

In 2021, it's the same as when One-Way Pockets was written.

Yes, most investors will be unprepared for the next bear market... yet, you can be different.

Follow the subscriber link below to read our new Global Market Perspective (publishes October 1) for financial insights that will help you to protect your portfolio.

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