Their actual study went back to 1954, when the Fed Funds Rate was tracked.
They overlaid the Fed Funds Rate to the 3-month T-Bill Discount Rate and were surprised to conclude that the Fed does not make monetary policy, it follows the market. In falling interest rate markets, the Fed Funds Rate lagged higher, whereas in a rising interest rate environment, the Fed Funds Rate lagged with a lower margin over the 3-month T-Bill Discount Rate.
In essence, Tony Cherniawski and his colleague concluded that the Fed is one very large hedge fund. The “carry” is the 90-day T-Bill and the investments are the loans made to financial institutions. The Fed now faces two problems. First, T-Bill rates are extremely low and the spread is very thin. Second, Washington’s voracious appetite for more debt is resulting in record-breaking Treasury auctions, putting (rising) pressure on interest rates.
Federal Reserve Chairman Ben Bernanke said in a recent statement that the timing of the end of record-low interest rates would depend on economic conditions, but the Fed would be ready to move.
"The sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments," Bernanke said in written testimony.
No, Ben. It will depend on the markets.
Dr. Janice Dorn is the only Ph.D. (Brain Anatomist) and M.D. (Board-Certified Psychiatrist and Addiction Psychiatrist) in the world who actively trades, writes commentary on the financial markets and manages a subscription-based website. Dr. Dorn has been trading the gold futures markets full time since 1993. She has written over 1000 articles on trader and investor psychology, and mentored over 600 traders and investors.She writes on all aspects of trading psychology and provides a real-time trading service on her website: TheTradingDoctor.com.