But the Fed will Fix This! Really!?
- cornerstoneams
- 4 days ago
- 5 min read
The cost of capital, i.e., the price of money, is the most important price of all within an economic system.
Where that price is currently (think interest rates), or in recent time, offers relatively little information and impact compared to a broader view of such price. The big trend - or what we have labeled “The Megatrend” in past editions - embeds key and important information.
If interest rates are generally double digits in an economic system, but the structural backdrop, along with the trend itself, offers those will be withering lower, given time, said high cost of money will not be as burdensome for the system at large in light of the lower trend.
Conversely, if an economic system has been immersed in low interest rates for a long while, and the masses fully expect the cheap money to continue, the economic system at large will have a slow but steady adjustment process to work through.
Interestingly, this slow but steady socioeconomic adjustment process is unfolding in our current era.
What the unexpected uptrend in interest rates (price of money) represents is a complete change from the multi-decade entrenched view that interest rates can only be low, and, in time, only move lower, as though it is a law.
Collectively, we are moving toward recognition that indeed a high-interest rate environment is occurring, and yet, collective belief holds on that it will not have staying power and hence, will change “soon.”
Our current era is evolving through the typical collective disbelief of significant trend change, in particular when the trend change is something as socioeconomically impactful as higher interest rates.
Ultimately, this will evolve into the masses psychologically adjusting to not only an acceptance of such, but an expectation that this is the way it is, and will continue to be, for a long while. A new entrenched view will emerge, given time.
The stages of trend recognition and acceptance, on a collective psychological basis, do not unfold quickly.
Importantly, the process of collective recognition on through to expectation is a grind, of which we collectively continue to grind through in this current era. We will reach the collective point of ultimate acceptance that a new megatrend of high interest rates did indeed begin – ah, 5 years ago.
This is Really Happening
Let’s move from general theory and observation of megatrends, and the inherent collective psychological adaptation process of such, and onto the reality we have been living that interest rates, i.e., the price of money, has ended their multi-decade megatrend of lower and lower levels.
We have all evolved to the expectation that interest rates can only, and will only, stay low being this has been the case, on a trend basis, for four-plus decades. This entrenched collective belief system dies hard, while reality itself is continually presenting it is a mistaken psychologically held view.
We have shared the above chart in various editions over recent years, and for my part, personally, I have been monitoring this chart for the previous fifteen, if not, twenty years.
The motive for me doing so always fell under the view that when this megatrend changed, and it would change, being that all trends ultimately change, it would change all that we had become socioeconomically accustomed to through the collective expectation of ever cheaper money, i.e., lower interest rates.
The above chart is the benchmark 10-Year Treasury note, on an interest rate basis, dating back to the late 1970’s.
The red down trend line clearly identifies the multi-decade trend of ever lower rates.
As visually depicted, this downtrend ended as rates easily moved up through the (red) downtrend line and remain at elevated levels in the current day.
Our short blue horizontal line was inserted when offering and following this storyline in an edition from nearly three years ago. The point of that blue line was to act as a marker that these rates, if they were to show any sign of containment, would hold below the blue line.
As depicted, they moved even higher, and rather than it acting as a ceiling, it has become a floor, which has held as a low point, not a high point, as these rates have elevated and held high from that time nearly three years previous.
As a side note, it will be easy to interpret this as an opinion shared from us and how we see the interest rate world, if you will. This is not the case.
We invite you to trust your eyes. We are merely sharing a message from collective bond market participants (the smartest market btw), which has been unfolding for over five years. The above megatrend change is not an accident. The smartest market did not suddenly become stupefied.
But the Fed will fix this
Part of the entrenched view of the multi-decade downtrend in interest rates is that the Fed is the ultimate determiner of interest rates. This is false. Bond market participants are the ultimate determiners of interest rates.
The Fed can choose to lower their short-term rate, known as the Fed Funds rate, but there is no law that states bond market participants must follow the path of the Fed’s directional change in their benchmark rate.
A case in point dates back to September 18th of 2024 and on up through the current day. Back in September of 2024, the Fed began a new rate-cutting cycle.
In that cycle, from September through December of 2024, the Fed cut their Fed Funds rate by one full percent. After a pause in rate cuts for the bulk of 2025, they continued with further cuts in September through December of 2025.
All told, from back in September of 2024 on through here to early 2026, the Fed cut their Fed Funds rate by 1.75%, or 175 basis points.
For their part, collective bond market participants consistently sold bonds off, to include the above charted benchmark 10-Year Treasury notes. As bond participants sold these Treasuries, all while the Fed was cutting, prices moved lower, which in turn, increased the 10-Year Treasury Note rate.
(When bond prices move lower, their interest rate moves higher.)
Yes, the Fed reduced their benchmark rate by almost 2%, while bond market participants increased the 10-Year Treasury note rate.
With this, the Fed Funds rate was dropped from 5.5% down to 3.75% from September of 2024 through the most recent Fed cut in December of 2025.
On September 18th, 2024 (the beginning of the Fed’s cutting campaign), the benchmark 10-Year Treasury note was yielding (think interest rate) 3.6%. As of this writing, the 10-Year Treasury is now at 4.25%.
Bond market participants have pushed this interest rate up by more than half of a percent (65 basis points to be precise) all while the Fed cut their benchmark rate by 1.75%.
Mortgage rates have a correlation in trend to benchmark Treasury securities. During the aforementioned Fed rate cutting cycle, the 15 Year Fixed National Average Mortgage Rate has also increased.
Back in late September of 2024, the above mortgage rate was quoted at 5.15%. Today, the fixed national average is 5.49%. Mortgage rates have risen by 3/8% or 34 basis points, to be precise. This, while the Fed cut by 1.75%, or 175 basis points.
Now, who controls interest rates?
Collective bond market participants control interest rates.
Media sources can discuss and focus all day long on whether the Fed will cut, raise, or pause, at any given time.
Our true focus should be placed squarely on the bond market and what they are signaling via their trend characteristics if we really want to know what direction interest rates are moving toward.
They continue to message that the high rates they put in place, via daily bond market trading, remain stubbornly in place. With this, they are offering little expected change is on the horizon via the lack of trend characteristics that would offer lower rates are imminent.
If you really want to have a sense of where general interest rates are heading, directionally speaking, watch the Treasury bond market for insight.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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