Fed Chair Pushes Rates Up; Rates Fall Next Day – Reminding Us How Powerless The Fed Is; Expect Lower Rates!

Interest rates moved higher yesterday in response to the Fed’s comments implying we will not see a rate cut this year, among other things.

The bond market then decided to remind the Fed who’s really in charge by pushing rates lower this morning in response to a peace deal with Iran and falling oil prices.

The markets often respond to Fed comments in the near term, only to offset those moves soon thereafter with reactions to actual economic data – which is what happened today.

It is a huge reminder not to get concerned about market reactions to Fed comments, as the Fed has much less power than most people realize.

More interestingly, Analyst Joe Brown makes a very strong case for rate cuts and FALLING RATES later this year – discussed below.

Fed Chair Warsh:

1. Kept the Fed Funds Rate steady (as expected).
2. Revealed his “hawkish” stance – more committed to inflation fighting and less likely to cut rates (particularly this year).
3. Discussed creating more accurate analysis tools – including a better inflation tool that measures millions of prices in real time (like Truflation does).
4. Pushed back on “forward guidance” – or the interest rate projections of Fed members (thank God).

Who Cares What the Fed “Projects?”

I am always amused to see the market hang on every Fed comment and projection. This is because the Fed is wrong so often, and because if the Fed members could predict where rates were going to be – they’d be billionaire bond traders rather than Fed bureaucrats.

I think Mr. Warsh figured that out too.

Here Are a Few Minor Things the Fed Missed

1. That pesky 2008 financial crisis. Bernanke called subprime “contained” in 2007 and the Fed missed both the housing bubble and the systemic risk buried in mortgage-backed securities.
2. The 2021–22 inflation surge (whoops). The Fed insisted inflation was “transitory” through most of 2021, then had to hike 525 bps in the fastest tightening cycle in decades.
3. 1970s stagflation (could happen to anyone). The Fed repeatedly under-tightened, misjudged how entrenched inflation expectations had become, and didn’t break it until Volcker in 1979–82.
4. The 2023 regional bank failures (SVB, Signature, First Republic). Fed supervision missed glaring interest-rate and duration risk on bank balance sheets — risk the Fed’s own rate hikes had created.
5. The 1998 LTCM blowup. The Fed didn’t see a single hedge fund growing large enough to threaten the financial system, then had to orchestrate a bailout.
6. The dot-com bubble (2000–01). Greenspan flagged “irrational exuberance” in 1996, then kept policy loose and let the tech/equity bubble inflate for years before it burst.

TLDR: The Fed misses most major events, rarely projects accurately, and pretty much just responds to market data as it surfaces (but more slowly than the bond market does).

What Tools Does the All-Powerful Fed Have?

1. The Fed Funds Rate: It can raise and lower the Fed Funds Rate to influence borrowing and bank lending.
2. Buying and Selling Bonds: They can do this to shrink the money supply or to buy up assets en masse (QE) to try to bring down rates – but the impact is much less than most people realize.
3. Jaw boning: The Fed’s comments can move the markets (interest rates), but the impact is often short-lived (see yesterday).

In an all-out war, the Fed will lose to the bond market.

When Was the Last Time the Mighty Fed Hit Its 2% Target Rate of Inflation?

It’s been over five years! And it was only low in 2021 because we locked down the world. And prior to that, inflation was kept in check by cheaper imports and ongoing technological and productivity improvements – not by the Fed.

Why Does Joe Brown of Heresy Financial Think Rates Will Fall This Year?

Joe Brown released this short video today: Rates Are Headed Lower, Not Higher! (5+ minutes at 2x).

1. Falling oil prices will ease inflation and give the Fed leeway to cut.
2. We need rate cuts to stem a brewing credit crisis, resulting from too much debt at too high a rate.
3. The federal government desperately needs lower rates to lower its interest expense
4. The Fed will loosen bank regulations to encourage more lending, and more supply of loans means lower rates.

Brown actually expects a boom later this year. But, he warns that booms like that always result in busts later on.

So, if there is a boom, expect a bust and save your acorns.