How Interest Rates Really Respond to the Fed

(4/7/22) How do interest rates respond to Fed dynamics? Meeting minutes from the latest FOMC confab reveal a majority of Fed members favor an accelerated tapering of the Fed's balance sheet, and schedule of rate hikes--leading to Wednesday's sell-off. Historically, previous rate hikes and balance sheet lightening resulted in counter-intuitive movement in actual interest rates. Using the 10-year Treasuries as a proxy, it's interesting to note that rates actually fell as investors moved into a risk-off mode, out of stocks and equities and into bonds for safety. Once markets figure out that a rise in interest rates PLUS the Fed's hiking rates and tapering its balance sheet too quickly is tightening money supply, crimping demand, causing recession, and slowing the economy, rates drop rather sharply. By the time we get back down into the next recession, most likely, rate will ultimately retrace back down to the half-percent level, if not lower.

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