Hike, Pause, Cut

It’s been a rough couple of weeks (months/years?) for one of the most powerful entities in the entire world. First, they were too late to raise rates. Then they raised them too much, leading to some of the biggest blowups in banking that this country has ever witnessed.

You would think that the recent events would cause them to pause and reassess the damage, but no, they went ahead with another 25 basis points anyway even though the market is telling them to stop, and maybe even cut.

As the chart below shows, the 2-year treasury rate and the fed funds rate tend to move together.

But sometimes their paths diverge, when the market, which controls the 2-year, disagrees with the fed, which controls the fed funds rate.

A great example of this was when the fed was late to raise rates through 2021 into 2022. The 2-year went from basically zero to 150 bps before the fed finally got off zero.

The fed doesn’t follow the 2-year because of some gravitational pull, just that the market tends to see things before they do. And right now, as you can see, the market is telling the fed to chill, which historically hasn’t been great.

Warren Pies tweeted this graphic which shows the difference between the 2-year treasury and the fed funds rate. Every time this goes negative, something nasty followed.


This chart shows a clear history of the fed going too far. Once they stop, they keep going until something breaks. And judging by their recent actions, the largest bank failure since the great financial crisis is evidently not enough. They want more.

I’m not a fed hater. I have respect for the institution and how difficult their job is. The pandemic dealt them a seven-deuce off suit, which clearly they weren’t responsible for. But then they went all in on the river, and the market called their bluff.

It’s not a question of if the fed cuts. The only question is when and why.

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.