Why The Fed Stopped Raising Rates, It’s Probably Not What You Think

I hear all this commentary about how bad things must be now that the Fed has made this massive pivot and, blah, blah, blah. Stocks have come too far too fast and what does the Fed know. Really? Really?

Was the Fed’s pivot such a surprise? It wasn’t for me. It likely wasn’t to you, since we have talked about this for MONTHS. I mean you don’t have to be a rocket scientist to see that we live in a world of low rates. You do realize that Italy has a 10-year Bond yield of 2.48%. That the UK, even with Brexit, has a 10-year yield of 1.07%. Germany has a 10-year at 0.05% 

I have about 265 years of history that would suggest the rates we saw in the 1980s, 1990s, early 2000s, will probably not been seen for another 265 years. True these are UK rates, but I think it shows my point.

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Then there is another point of view on US 10-years. Get the point?

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The Fed had no choice but to stop raising rates. We don’t live in a bubble, filled with lollipops, unicorns, and umpa lumpa’s. We live in a global economy that is intertwined. Foreign investors can buy our bonds rather easily, and spreads between US and German bonds were trading at their widest spreads in nearly 30 years, what do you think was going to happen? What would you do? Would you rather own a US Treasury at 2.6% or an Italian Bond at 2.45%? What about a German Bond at 0.05%. It is common sense. Duh :-P.

Sure the Fed could have kept raising rates, but the structure of the global yield curve would not allow them too. Simply put, the FED can’t raise rates any higher. Draghi ended that notion in early March and in a way dared the Fed to raise rates again. He was probably hoping they would continue to raise rates so that the dollar would soar and the euro would drop like a stone.

I wouldn’t be surprised if Draghi gets even more accommodative in the future meetings. He wants the Euro near parity to the dollar. A cheap euro stokes inflation, and what is Europes most significant problems inflation and growth.

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Disclosure: Michael Kramer and the Clients of Mott Capital own Acadia, Apple, Netflix. Michael Kramer owns SPY Calls

Disclaimer: This article is my opinion and expresses my views. Those views can ...

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