The Fed — Why Are We Paying These Guys

When it comes to interest rates, the Fed is NOT in control. The Fed does not lead; it follows the market.

This chart shows the Federal Funds Rate alongside the U.S. Treasury 2-Year Yield. You can see that at major turning points, it’s the 2-Year Yield that moves first, and then after a while, the Fed changes its benchmark interest rate. This was profoundly the case in 2019 when the Fed cut rates well after the 2-Year Yield had declined. And of course, in 2022, the Fed had lagged the move higher in 2-Year Yields by many, many months before it started hiking.

Conventional analysts and the financial media are obsessed with how the Fed will change interest rates, thinking that it will influence the financial markets. But to find out how the Fed will act, all they need to do is look at the short end of the bond market.

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