Category Archives: Interest Rate Monitor

In our last posting on March 13, 2017, we said that the financial markets were widely anticipating that interest rates would increase.  However, we persist in the belief that the leading indication of interest rate direction comes from watching the direction of the 3-month Treasury, which is a market driven instrument.  As reflected in the chart below, we’re in for a bumpy ride ahead.

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The markets are anticipating an interest rate increase at the next Federal Reserve meeting on economic policy and many could legitimately say that this anticipation is what drives the short-term rates higher. 

However, history is on our side on this matter.  As pointed out in previous postings, Federal Reserve rate policy always follows the actions of short-term rates as demonstrated in the last comparable cycle in interest rates from 1953 to 1980.

On December 16, 2015, we published an article titled “Interest Rate Policy: Bizarre to the Uninitiated”.  In that hit job against the Federal Reserve, we said the following:

“The article [“Bizarre Theory That Says Fed Increases Will Fuel Inflation”] promotes the idea that the Federal Reserve somehow is on the leading edge of setting policy.  We don’t believe this to be the case.  In our November 2015 article on gold and interest rates, we said that market rate movements take place before the Federal Reserve takes action, rather than the other way around.”

In this piece, we track interest rates from the recent all-time lows and compare the Federal Reserve Bank Discount Rate to the 3-month Treasury Rates.  We will demonstrate how the Federal Reserve routinely follows the activity of market rates as reflected in the 3-month Treasury Rates.

Remember, The Discount Rate is the primary tool that the Federal Reserve is judged on in terms of it’s affect on the U.S. economy.  This excludes “emergency” measures such as ZIRP, TARP, TALF and QE∞.