“The past is never dead. It’s not even past.” “Requiem for a Nun” (Act 1, Scene 3), by William Faulkner
Faith in the appealing proverb “don’t underestimate or fight the Federal Reserve Board” has become increasingly deep and widespread in recent years, and especially within stock investment congregations. This dogma underlines that mighty guardian’s powers and its willingness to employ them, not only to assist and even rescue the economy, but also to eventually halt substantial stock declines in the S+P 500. The Fed’s past successes have built and reinforced reliance by economic players as well as political leaders on it.
The Fed has other central banking allies in its noble efforts. Also, at times efforts by national political leaders in the United States and elsewhere, when dangerous and terrifying situations threaten, enact major assistance packages (such as avalanches of deficit spending).
If underestimation of the Fed is possible, then so is overestimation of it. The Fed of course is not the only performer on the economic and political stage, and marketplace and other cultural conditions can evolve, change significantly, or become extreme. Therefore, the great confidence in the Fed nowadays has an implicit corollary. Fed devotees and marketplace watchers “should not overestimate the Fed and its powers.” For example, the revered Fed probably does not have unlimited power to keep Federal Funds rates and United States Treasury yields repressed.
Not only may inflation propel interest rates higher than currently expected or desired. So can massive deficit spending and huge debt, especially if created by the US federal government.
The major yield increase trend in the United States Treasury marketplace (enlist the UST 10 year note as a benchmark) which commenced with 3/9/20’s .31 percent low probably will continue. A notable target for the UST 10 year is around the 3.26 percent top attained on 10/19/18. Even if over the so-called long run the UST 10 year yield does not eventually ascend to 2007’s seemingly ancient high (5.32pc; 6/13/07), attaining such an elevation is considerably more probable than most marketplace preachers proclaim.
Marketplace history of course is not marketplace destiny. Assorted variables in addition to interest rate levels and trends influence stock prices. However, many times over the past century, significantly increasing United States interest rate yields have preceded a noteworthy pinnacle in and the start of bear trends for key stock marketplace signposts such as the Dow Jones Industrial Average and S+P 500. The yield rise in the UST 10 year note since its March 2020 bottom probably signals that the S+P 500 has established a significant top or soon will do so.
FOLLOW THE LINK BELOW to download this article as a PDF file.
Truth and Consequences- Rising American Interest Rates (3-9-21)