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n. Illinois | 1st off. No one has a crystal ball on interest rates.
We all have our theory's and the vast majority of them are wrong. History has told us that the Fed does not have inflation under control. Heck we can't even get them to admit that allowing the supply of money to grow year over year at 19+% in 2020 and 16+% in 2021 with some months showing growth of money supply of 25%. This has never been done historically and we have no idea of how it will play out. A bit of historical context. In the 1970's they allowed the money supply to grow year over year over 12% in 1971-1972, 1976-1977 and again in 1983. These growth rates are what created the inflation back then. You also need to understand that the Government changed how they calculate inflation to hide it to hold down the automatic increases in things that are indexed to the inflation rate IE social Security payouts. IE they used to use a static baskets of goods. If the price of ribeye's go up then that would be reflected back in the 1970s. Today they take the Ribeye's out of the goods measured and replace it with something else. I am sure its something that didn't go up as much.
You also need to understand that the basket of goods used to determined the CPI is weighted IE Food makes up a set % of the index. The largest component of the CPI is housing. Its 36% of the index and 72% of that number is a made up number called Owners Equivalent rent of primary residence. IE they supposedly survey homeowner's what they would pay to rent their own home. They do not use the cost of new homes or the sale prices of old homes. They do not use the rental market. They use a number that no one can know if what they are showing is legitimate. So if you wanted to manipulate the CPI lets have the largest component easily manipulated behind the scene with numbers that no one can verify.
So inflation is not an accurate representation of the real inflation rate out there.
The Fed has allowed all of this. They have complete control they did not have to massively increase the supply of money. They will never admit that they are 100% responsible for the inflation going on.
So the Fed cut interest rates which is only at the short end of the interest rate market. IE it only impacts variable rates or very short term rates. The longer term market IE Home mortgages and Farm Mortgages is 100% driven by the 10 year t-bill and now that the Fed isn't buying almost all of the new debt being issued by the Treasury Dept the real bond market is saying Interest rates are going up (they have increased 70 BP since the Fed cut rates) and the fall is normally when interest rates seasonally decline vs the spring when interest rates seasonally increase. So it would not surprise me to see 10 year t-bills head to 5%+ this coming spring.
But never underestimate the Fed's ability to F things up. When they do mess up (2000, 2008 and 2020 when they failed to do the only thing they are actually chartered to do which is be the lender of last resort to the commercial banking system so the bank failures of the 1930's doesn't happen again) Their only play is to drop interest rates (they will once again go to zero or maybe a negative rate this time) and print billions of new dollars. | |
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Interest Rates
