Charting the Fed's Effectiveness

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There's definitely a correlation between mortgage rates and the Federal funds rate. However, correlation does not prove causation. Let's dig further.


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Look at that. Mortgages are even *more* tied to 3-month Treasury bills. The correlation has gone up. It's almost like the Treasury market overall is smarter than the Fed. Who would have guessed?

This thought process begs the next chart.


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There is an extremely high correlation between the 3-month Treasury bill rate and the Federal funds rate. It isn't perfect though. Why is that?


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In my opinion, it is because a small group of detached people sitting within a closed room inside an ivory tower can do some incredibly stupid things if they put their minds to it. This is just a theory of course.

Ivory Tower

From the 19th century it has been used to designate a world or atmosphere where intellectuals engage in pursuits that are disconnected from the practical concerns of everyday life. As such, it usually carries pejorative connotations of a wilful disconnect from the everyday world; esoteric, over-specialized, or even useless research; and academic elitism, if not outright condescension.

October 27, 2005
Bernanke: There's No Housing Bubble to Go Bust

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

Source Data:
St. Louis Fed: 30-Year Mortgages vs. Fed Funds
St. Louis Fed: 30-Year Mortgages vs. 3-Month Treasury Bills
St. Louis Fed: Fed Funds vs. 3-Month Treasury Bills
St. Louis Fed: Fed Funds Minus 3-Month Treasury Bills