Rate Hike? What Rate Hike? By Brad Thomason, CPA
The Federal Reserve raised interest rates two months ago on December 15, 2015. On that day, according to the St Louis branch of the Fed, the average 30 year mortgage in the US was going for 3.95%. According to the same source today, that rate is now 3.65%. Apparently someone forgot to tell mortgage lenders that the rates went up.
If we look over in the treasury bond market for a more sane result, we get…more of the same. According to our pals at the US Treasury, the yield on 10 year bonds didn’t move appreciably when the rate hike was announced; and the yield today is lower than it was two months ago.
But the Fed raised rates. What the hell’s going on?
I have tried, on more occasions than I care to recall, to explain that the idea that “the fed sets the rates” is not as straight forward as we might like. Does the Fed set rates? Obviously. It’s just that the markets aren’t under any obligation to pay attention.
Consider the relationship between cows and cowboys. From the standpoint of sheer physical strength, there is no logical reason why a cow would ever do much of anything a human wants it to do. Yet they do, almost all the time. Not because cowboys have lassos or cattle prods, nor because they ride horses or four wheelers. Most of the day-to day herding that goes on happens because a guy walks out among his cows and gently steers them where he wants them to go. I know. I played cowboy a bit back in my youth. The cows follow the cowboys because they do. Not because they have to. It’s just something about their nature.
Except for every once in awhile when the cows don’t care what the humans say, and take off on their own. When this happens, in that moment, there is nothing short of killing the cows that the human can do to prevent them from doing whatever they want.
Because, you see, cows are pretty strong. And there are a lot of them.
Central banks play cowboy to the interest markets. They do what they can to guide the markets in a calm fashion. It is generally accepted that it is better for the cows to not be riled up, and it is also true that most central bankers, even if they are fallible human beings, nonetheless really do try to do what they think is best for the cows…err, I mean markets. Most of the time, the markets go along with this. But they don’t have to. And sometimes don’t.
The market ultimately sets its own rates. This has been harder to see the last few years, because the Fed didn’t do anything. But now they have. If the Fed were the all-powerful rate dictator that some claim them to be (vilify them to be…) then we would have seen a 25 basis point step function in all of the market rates of interest, just like the ones that show up on the charts for fed funds and prime lending rates.
Except we didn’t. Which should put to bed once and for all the notion that “the government sets interest rates.” It won’t. But it would be nice if it did. Because that’s pretty clearly what the data shows.