Why is the Federal Reserve's interest rate control seen as out of control?

Source: Liu Jiaolian

After a rapid decline on Thursday, BTC stabilized around 96k overnight. The entire cryptocurrency market also showed resilience, temporarily halting the downturn.

Since September this year, the Federal Reserve has cut interest rates three times, reducing the federal funds rate by a total of 100bp, from 525-550 to 425-450.

Unusually, the 10-year U.S. Treasury yield also began to rise in September and increased by nearly 100 basis points by the end of the year, rising from around 3.60% to around 4.60%.

This is a local high in April, and it is also the historical high in 2007, 17 years ago.

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What happened in 2007 needs no introduction. That year, the subprime crisis began to spread in the United States and eventually triggered a global financial crisis. In 2008, Satoshi Nakamoto suddenly had an inspiration and invented Bitcoin.

Now, the Federal Reserve has cut interest rates by 100bp, and US bond yields have risen by 100bp. A serious deviation. The Federal Reserve's interest rate control seems to have lost control. The lower the interest rate, the higher the market rate!

Friends who understand how the Federal Reserve conducts macro interest rate regulation - which is actually intervening in market interest rates - should know that raising or lowering interest rates by the Federal Reserve does not directly change market interest rates. Instead, it uses the so-called open market operations to buy and sell U.S. Treasury bonds, and transmits the interest rate adjustments to the market through these bonds.

For example, there are these two items in the minutes of the December 2024 monetary policy meeting.

• Conduct standing overnight repurchase agreement operations with a minimum bid rate of 4.5% and a total operating limit of $500 billion.

• Conduct standing overnight reverse repurchase agreement operations with an interest rate of 4.25% and a daily limit of $160 billion on a single counterparty. The rate is set at the lower end of the target range for the federal funds rate to support the effective implementation of monetary policy and the smooth functioning of the short-term funds market.

Bond yields and bond prices are inversely proportional. Just this fact confuses many people.

Can the Federal Reserve keep the market interest rate in the range of 425-450 by selling US bonds at an interest rate of 4.25% and buying US bonds at an interest rate of 4.5%?

Not necessarily.

For example, before the interest rate cut in September 2024, the Federal Reserve's rate control range was still at a historical high of 525-550, but the interest rate in the U.S. bond market had already dropped to a local low of 360, with an intermediate interest rate spread of nearly 2 percentage points.

What does this indicate? This indicates that the market is crazily buying US bonds, completely ignoring the 'official price' of the Federal Reserve.

Of course, the Fed only trades with designated large banks, and ordinary people cannot participate directly at all.

Is the market irrational really optimistic about US bonds, or are retail investors unwittingly being lured into the game by investment advisors?

Jiao Lian still remembers that period of time, when the internet was flooded with posts promoting US debt and urging people to enter the market.

Looking back at the chart, that wave of public opinion guidance should correspond to the decline in US bond yields from May to September. By September, it was already the end.

Interest rate expectations, market rushing ahead, what is the logic? Or in other words, what are the sales tactics?

Jiao Chain thinks that it will probably be like this: 'Boss, look, the Federal Reserve is about to open the interest rate cut channel. Why don't we buy some high-yield US bonds to hedge and appreciate? There won't be such an opportunity if we miss it. When the Federal Reserve lowers interest rates, only low-interest US bonds will be available for purchase.'

Unfortunately, the iron law of the financial market is always either to suffer losses or be fooled when listening to others' investment advice to make decisions.

Interest rate cut implemented, US bond market plunges. Chasers left buried.

What is the reason for being buried? The buried logic is also very simple, that is, the Federal Reserve cuts interest rates, the market is risk on, that is, the so-called risk appetite rises, capital sells US bonds to chase high-risk US stocks, bonds fall and stocks rise, and US bond yields rise instead of falling.

But think about it, are all capital really willing to allocate high-risk assets with enthusiasm and excitement?

Or is it forced by high inflation expectations in the future?