Godzilla vs. King Kong
When I was a kid in the latter middle of the previous century, I used to go to the movies to watch two monsters fight in what had to be the most poorly directed, low tech, pathetic and ridiculous movies ever made.
The monsters of course were Godzilla and King Kong, and we boomers, ignorant suckers that we were, drank it all in with tremendous enthusiasm. And, given that Saturday matinee tickets were only 25 cents, it was a real bargain!
And, if memory serves me, Godzilla usually won – which is a great reminder for all of us: Don’t f*** with giant lizards! (words to live by!)
Fedzilla vs. King Bond Market
Today, we are seeing a similar battle of monsters, but the outcome is very different.
The two monsters are the Fed and the Bond Market, and the Bond Market seems to always win.
A Few Weeks Ago, I Wrote This Blog: Why The Fed Desperately Wants To Tank The Housing Market
In that blog, I explained how consumers spend a lot more when they feel rich because of their asset holdings, even if their income and cash positions are not any stronger.
Hence, a lot of home equity spurs more spending, more demand, and … more inflation – in what is known as the “wealth effect.” So, the Fed wants to bring down home and stock prices in order to curb spending and demand, and thus slow down inflation.
Mortgage Rates Fell 3/8% After The Fed “Raised Rates”
Since the Fed “raised rates” 0.75% on June 15th, mortgage rates have FALLEN about 3/8%!
10 Year Treasury Yields have plummeted even further, falling almost 3/4%!
Why Have “Rates” Fallen So Much After The Fed Raised “Rates?”
This is another horse I have beaten into a pulpy mess, but am doing so again because I continue to see so many people speak of the Fed as an “all-powerful being” – when it is clearly not.
The Fed controls the short-term “Fed Funds Rate,” or the overnight rate that banks charge each other.
The Fed does NOT control long-term rates like the 10 Year Treasury or 30-year mortgage rates.
The Fed can influence long-term rates with its comments and by raising the Fed Funds rate, but it does not have the final say.
The Bond Market has the final say, and that is exactly what we have been seeing over the last three weeks.
Bond investors are pushing down yields and rates primarily because they see a recession on the horizon – which will likely bring down rates further and possibly help quell inflation.
Fed Is Like The Wizard Of Oz
Jeff Snider of the Eurodollar University Podcast often makes the case that the Fed is not much more than a lot of bluster, with much less power than we think – much like the Wizard of Oz.
The Wizard of Oz could not get Dorothy back to Kansas, and similarly the Fed can’t get us where we want to go either.
Once again, I highly recommend Mr. Snider’s podcast, as he loves to dispel myths about the Fed – or to pull the back curtain, as it were.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167