The Fed Lowered Rates by a Half Percent but Interest Rates Have Risen One Quarter Percent

October 10, 2024

By Robert Wiedemer

We’re Talking about Two Different Interest Rates

So, why are rates going up if the Fed just lowered rates? 

Because there are two different rates.  The one the Fed cut is the overnight rate.  That’s a very short-term rate and affects short term interest rates such as money market funds.  The rate for money market funds has promptly dropped almost a half percent from 5.20% to 4.75%.

However, the long-term rate -- the 10 year rate – jumped from 3.8% to over 4%.  It’s not directly affected by the short-term rate.  Mortgage rates are driven in part by the 10 year rate and that’s also why they didn’t fall much after the Fed’s announcement. 

Long term rates are directly affected by whether the Fed is buying or selling bonds.  If the Fed is selling bonds rates will be pressured upward.  And that’s exactly what is happening – the Fed is selling about $50 billion in bonds per month, although in the last 3 weeks they sold $65 billion.   

Many investment analysts will tell you that the long term rate is going up because the markets are anticipating a better economy or that bond investors are skittish about our rising national rising debt.  Not true at all in the short term.  Long term rates are going up due to the Fed’s intervention (or lack of intervention) in the bond market.  I can practically guarantee that if the Fed stopped selling bonds tomorrow, the 10 year interest rate would drop.

Why Does the Misconception about the Fed’s Rate Cut Announcements Persist?

Smart investment analysts should know better.  They should know that the Fed’s announcements on interest rates aren’t directly affecting long term rates.  But why does that misconception persist?  My guess is that they like to think that the Fed is very powerful.  All it has to do is make an announcement and rates go down.  Lots of power.  That’s simply not reality.   Again, it’s the Fed’s intervention (manipulation) in the bond markets with their printed money that impacts long term rates. 

I think many analysts want to ignore this key point because it means the Fed will almost certainly have to print money again to keep rates from going too high, which could eventually lead to inflation. It’s much less scary to imagine the Fed can simply reduce rates by announcing lower rates rather than by printing lots of money. 

The reality is we can’t have the Fed and Congress BOTH selling bonds.  That will drive up long term rates.  Only one of them can sell and the other has to buy.  The buyer, of course will be the guy who can print money.