Interest rates hardly budged in the aftermath of the U.S. raid on Venezuela – and it tells us much, given the bond market’s track record of accurate predictions.
If violence or war in Venezuela were likely to escalate, rates would probably be falling – like they typically do when the world is facing serious geopolitical risks (investors move to the safety of bonds).
Similarly, if Venezuelan oil were soon going to flood the market, we would have likely seen oil prices fall, and we could see rates fall further given the impact of energy prices on inflation.
But, oil prices, after falling early this morning, are almost back to pre-raid levels (this is likely because the markets figured out that it will take years to get Venezuela’s badly degraded oil industry back to full production – down 70% from the 1990s).
Trump Wants 1% Rates
Mr. Trump said several times last year that he wants 1% interest rates, amusing many and irritating many more.
I believe he was referring to the short-term Fed Funds Rate – which is already pretty low, in the 3.5-3.75% range.
Mr. Trump is assuming a Fed Funds Rate that low will result in lower mortgage rates and bond yields (saving the government an immense amount of money and stimulating the economy).
But, as I’ve explained about 900 times in this blog, not only does the Fed not control long-term (mortgage) rates – but reducing short-term rates can result in HIGHER long-term rates.
And if the Fed lowers the Fed Funds Rate to 1%, we likely would see much inflation (from additional bank lending creating more money and from additional demand) – so the bond market and mortgage lenders would demand higher yields/rates (like we saw in the fall of 2024).
Esteemed analysts like Jim Bianco (who has been very accurate with his calls in recent years) remain very concerned about inflation and they believe the Fed has already cut far too much.
So – What Is the Most Powerful Force on Earth That Trump Can’t Fight?
Mr. Trump is likely feeling invincible after negotiating peace treaties, bombing Iran, and extracting Mr. Maduro from Venezuela.
But there is one force on earth that is so powerful that Trump will never, ever come close to subduing it – via violence, threats, or negotiation.
And that force is…
The Bond Market.
When the bond market senses something might be inflationary or that a country’s finances are not as strong as we’re being led to believe – it demands higher yields (no matter what).
There are numerous cases where the bond market has stopped or even brought down world leaders – with Liz Truss in the UK being the most recent example in 2022.
I suspect we’ll see a lot more casualties this coming year.
Mr. Trump might take heed.
I am pretty sure though that he won’t. 😊
