Why The Fed Crushing The Crypto Market Means Nothing
We had the clown show on parade today. The Fed has spoken and the trained seals responded. People do not seem to realize how all of this is a show.
Before making that point, let us discuss what happened.
In short, the Fed is going to raise interest rates. Are you surprised? Was this a major secret? Of course not. Everyone who is not in a coma knew this was coming. There was nothing hidden about this. Yet somehow the markets took this as negative news.
What is ironic is the market, along with all the talking heads on television, was calling for rate hikes. Thus, the Fed, manager of expectations, gave the market exactly what it wanted and it threw a fit. Still believe the markets have any sanity to them?
Nonetheless, the reaction of the market was real. Bitcoin sold off over $1,000 in a matter of minutes. This got the online world, most who never read further than a headline, scurrying about.
So what is truly going on and taking place?
Let us uncover that.
Manager Of Expectations
The Fed does nothing more than manage expectations. If people would take the time to understand this, they would shrug off this entity like a 5 year old school kid.
But aren't we taught, Don't Fight The Fed? Yeah we are taught a lot of things that turn out to be total bullcrap. This is just another thing on the long list of items.
Are you finding this hard to believe?
For most, it might be the first time ever hearing about this. Nevertheless, why is anyone caring what the Fed is saying about interest rates? What does it matter? The only reason is people believe the lies and misdirection.
Here is the reality: The Fed Does Not Control Interest Rates!!!
Is your head spinning yet? How can that be?
It is true the Fed does control the Fed Fund Rate. It has full power to move that up or down as it sees fit. This will, naturally, affect the short end of the yield curve. However, it has diminishing impact once you get to the 5Y and absolutely no impact at the 10Y.
How do I know this?
Because this is what the Fed's own research concluded.
This was posted on the St. Louis Fed's Website:
In contrast, the interest rate on a 10-year Treasury bond does not appear to move as closely with the fed funds rate. While there appears to be some co-movement, the 10-year interest rate appears to follow its own declining path.3
To go one step further, we will get the actual information from the reference research:
In contrast, long-term interest rates, such as the 10-year Treasury bond yield, despite following the overall trend described previously, deviate markedly from short-term interest rates for significant periods of time. Since the 1980s, long-term interest rates appear to be well above short-term interest rates when the latter are temporarily low. In other words, the spread between short- and long-term interest rates is inversely related to the level of the short-term interest rate. This pattern can be clearly seen during the most recent recession, when short-term interest rates declined sharply to near zero, while long-term interest rates appeared to continue their gradual downward path.
Well isn't that a kick in the pants. The 10Y, and by extension 30Y, keep going along regardless of what the Fed Fund Rate was. Other research determined the longer term bonds better correlated to the news. More on that in a moment.
But shouldn't we care about the short-term rates? For the most part, no. The amount of money dependent upon the longer term rates far outpaces the shorter end of the curve.
Mortgages are something that people are concerned about and as we can see, the correlation between the 10Y interest rate and the 30Y mortgage is strong. Hence, any move from the long end of the curve is likely market fluctuation. That end of the curve does not care what the Fed does.
And neither should you.
The fact people are listening to an organization that simply manages expectations is baffling. If people actually took the time to research what the Fed is doing, it is evident they are trying to instill a self-fulfilling prophecy.
History is showing that things tend not to go as the Fed intends.
Why Rates Will Go Down
So for all the noise about interest rates going up, the reality is they are likely heading lower. Certainly, as just mentioned, they could see higher levels in the near-term. Of course, when viewed historically, we need to realize the levels we are at.
One of the biggest factors is that declining interest rates are a sign that money is too tight. I know this is hard for many to believe considering the brainwashing that is out there. However, 30 years of declining interest rates is there for a reason. The monetary aspect, especially as it pertains to the Eurodollar system, are outside the scope of this article.
The key to know is low interest rates means money is too tight and high interest rates equate to loose money. We have to deal with the reality that money (USD) is tight globally in spite of the Fed's attempt to rectify it by "printing" an abundance of bank instruments since the Great Financial Crisis (GFC).
In short, the Fed has absolutely no control over what takes place with interest rates at the long end of the curve. This is what has the most impact upon the economy. Of course, that is another factor in this discussion. Many are seeing that the economic waters are very choppy. In spite of the attempts by the media and other talking heads (including those at the Fed) that things are great, the bond market is telling us the exact opposite.
The future expectations of high economic growth is not being forecast.
Therefore, I will predict that the market will be screaming for the Fed to start to reverse course before the Summer is out. There is no way we are going to see 4 rate hikes. My guess is they get one and maybe struggle through a second. However, #3 probably gets scrapped as the economic situation becomes clear.
Even Xi in China is warning of poor economic activity yet nobody seems to be listening.
Sometimes the answers are in plain sight and everyone misses them. That is the price we pay for listening rhetoric from the Fed.
They are nowhere near as powerful as they claim.
For this reason, expect the crypto markets to shake this off. It is nothing more than noise.
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