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The Asset Class Ain’t Buying the Fed’s BS
Source: A J Butler, CC BY 3.0 , via Wikimedia Commons
By The Investment Journal • Contributor Writer
Wednesday Jan 15, 2025

They were NEVER buying it!

The year 2024AD was supposed to be the year of rate cuts. Until the fly of sticky inflation early on flew into that ointment.

By September, the Fed figured it couldn’t wait any longer and got down to business. They assured everyone that…

Our patient approach over the past year has paid dividends: Inflation is now much closer to our objective, and we have gained greater confidence that inflation is moving sustainably toward 2 percent.

Then they tried playing catch up by cutting rates 50 basis points. 

With that they embarked on their quest for their next holy grail — “neutral.”  According to the Fed, “neutral” a theoretical interest rate level that neither slows the economy nor lets it overheat. Like we said, it’s the holy grail. 

It’s also a level they admit they don’t have a clue about.

No matter. They’re paid to do this kind of thing.

They’ve insisted they need to do this because their focus has shifted to the employment side of their mandate. According to Chair Powell…

As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished, and the downside risks to employment have increased. We now see the risks to achieving our employment and inflation goals as roughly in balance, and we are attentive to the risks to both sides of our dual mandate.

Translation: “Don’t worry. We got inflation. Now we have to do employment. After all, we can’t be pushing the economy into a recession…” 

The Reality Behind the Search for “Neutral”

This, of course, is all “narrative” — that is to say mostly BS. Inflation is still sticky by any number of measures. The real reason they need to lower rates is because levels above 5% are literally killing the Treasury. 

In 2024, the US Treasury rolled over roughly $8 trillion of debt. And not just any debt. It was roughly 2% debt that was being refinanced into nearly 4% debt (assuming maturities stayed relatively the same). You don’t need to be a math genius to realize this is a lousy trade where debt goes. 

But always the crafty one, Treasury Secretary Janet Yellen forged a workaround by rolling more than 84% of it (old debt plus new financing) into short-term bills — securities maturing in 6 months or less. 

Basically she was willing to pay up for a few months until Powell and company came up with a story to get rates lowered. The plan is not faring so well.

Because this year (2025) about another $3 trillion in debt will be coming due… Along with a bunch of debt rolled into short term paper last year.

Putting this in simple terms… The Treasury has another boatload of borrowing to do this year. 

In any case, the Fed had been spinning their story of conquered inflation and bringing rates down to neutral levels and feeding it to the media. Who in turn have been dutifully parroting it in all their reporting.

But… there has been one huge disbeliever in the whole bunch… 

The Bond Market

Back in September, when the Fed was insisting that they had it all under control and rates (including yields on Treasury debt) could safely come down — the bond market effectively flipped them the bird.

You can’t make this up… The very day the Fed commenced cutting, bond yields in the 10-year (the benchmark lending instrument) bottomed and started their trek higher. 

Source: Trading Economics

The other factor is the massive amount of debt that will eventually be hitting the market this coming year.  Supply and demand are still a thing.

Lately the Fed has been trying to walk back rate cut expectations for 2025. It seems they’ve come to grips with the reality that maybe it’s not quite time to go out in search of “neutral.” 

The bond market never bought it in the first place.

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