Monday, August 20, 2012

10-Year Treasury vs. Fed Funds

Click to enlarge.

As a permabear, I offer three predictions.

1. The Fed will not be raising interest rates within the next two years.
2. We will return to the median trend line (in the chart above) within the next two years.
3. The interest rate on the 10-year treasury will therefore fall over the next two years.

I do not consider these predictions to be "sure things". As I've said before, I have no crystal ball.

That said, consider this.

Japan's 10-Year Treasury currently yields 0.84%. Our annual inflation rate has been 1.4% over the last 12 months but -0.8% over the last 3 months. Where is the pressure for the Fed to raise interest rates?

April CPI: 229.177
July CPI: 228.723

(228.723 / 229.177)^4 - 1 = -0.8%

The Fed claims it is on hold until the end of 2014. I see little reason to think otherwise. In fact, I think it will be longer than that. For example, what would happen if we have another recession between now and the end of 2014? I bring this up because I do not believe that the Fed has permanently put a stop to recessions.

Some Fed analysts said that the central bank could well extend the 2014 date into 2015 if the economy remains weak.

I have just one thing to say about that. Duh!

Source Data:
St. Louis Fed: Custom Chart
FRB: Selected Interest Rates


Troy said...

Ol' George sure left his mark.

Stagflationary Mark said...


Well, he certainly p@#$ed me off. I'll give you that, lol. Sigh.