Message To The Fed: Repent, Oh Ye Of Little Faith

The Fed just won't listen to us. Last year, we warned Fed officials not to cut the federal funds rate (FFR) because we had more confidence in the economy than they did. We also observed that inflation remained above their 2.0% inflation target. We predicted that the 10-year Treasury bond yield and mortgage rates would likely rise rather than fall if the Fed lowered the FFR. They ignored us last year and proceeded to cut the FFR by 100bps between September 18 and December 18. However, the bond yield rose by 100bps (chart).

This year could be déjà vu all over again. The Fed ignored us again and cut the FFR by 25bps last Wednesday. Once again, the bond yield rose from 4.00% to 4.18% today. The Bond Vigilantes are getting restless!