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Doing the FOMC Policy Math

By Jeff Goble

A pattern emerges when we carefully research the last three Federal Reserve interest rate tightening cycles since 1989, as you can see in the chart presented here. We have compared their slopes and percentage changes with the current rate normalization program, which began in December 2015.  The basic investment premise here is that markets have a very strong tendency to repeat themselves, usually with an unexpected twist of some sort.  Doing the math helps removes the market emotion, in my opinion.

Speaking of math, there is a lot of it here that you can study as you wish but the most important thing that sticks out to me is the reaction in the past of the 10-Year U.S. Treasury as short-term rates have been increased.  While one would normally assume both short-term and long-term interest rates would move upwards in lock-step fashion, history shows that has not been the case.  Fed funds have moved up 186 percent on average, while 10-Year Treasuries are up only 6 percent, on average.

State Trooper Alert?

I travel a lot by car to our correspondent banks in my job and could probably write a book about my state trooper experiences over the years.   General state trooper etiquette rules are: keep your speed less than 10 percent over the posted speed limit, always wave to them politely, sign the speeding ticket quickly if it is raining, and never, ever pass them.

The reaction in the bond market during rate tightening phases in the past reminds me of what often happens when driving on the Interstate.  When one sees a state trooper with its lights blazing… every one hits the brakes to slow down.

In conclusion, the Fed action charts suggest that when the longer-term bond market sees short-term rates going up too fast, it stops going up in yield at the same pace, and can even drop. This can sometimes invert the yield curve.

Given the historic global demand for U.S. Treasury bonds because of their yield/currency benefits plus the historical data in the charts above, I think our highs in interest rates over the next year will be lower than we think.  The mathematical end points of this tightening phase, by the way, after an average tightening period of 23 months would be: Fed Funds at .37 percent and 10-year Treasuries at 2.28 percent.

Place your bets accordingly, and keep an eye out for that unexpected twist.


Jeffrey P. Goble is chief market strategist at Country Club Bank’s capital markets group. He can be reached at


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