Biz ‘Bite:’ Can you believe the Fed?

IBR Staff//March 1, 2022//

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Can you believe the Fed?

graph showing the short term disconnect between the Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity and the Effective Federal Funds Rate — Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity and the Effective Federal Funds Rate. Graph courtesy of the Federal Reserve Bank of St. Louis.

Economist Elliot Eisenberg, keynote speaker at the last two Idaho Housing and Finance Association conferences, made the following observation on Feb. 22: “Dating back to 2012, the Fed (Federal Reserve) has correctly predicted the fed funds rate, a rate they literally control, 37% of the time, core inflation 29% of the time, unemployment 24% and real (gross domestic product) growth 17%. Moreover, the Fed is consistently biased towards faster growth and higher rates than what comes to pass.”

Does this have implications for Idaho’s housing market? Since 30-year mortgage rates track 10-year Treasuries, how does the the fed funds rate affect the 10-year Treasuries rate? Since 2000, the fed funds rate and 10-year Treasuries have not tracked on a short-term basis, as the attached graph of both these federal rates shows. The logical conclusion is that the fed funds rate has little-to-no short-term influence on 10-year Treasuries and the mortgage rates that track them.