The Fed Is Behind The Curve

Todd Sullivan profile picture
Todd Sullivan

The Yellen Fed has been painfully slow to ratchet rates up to levels required by the US economy. As "Davidson's" chart below shows that historically the Fed Fund rates had been set ~.2% away from the 10yr. Treasury. Today that difference is ~1%. It's far too early to quantify exactly the ramifications of this but one has to wonder:

  • Has the prolonged recovery (now 9 years) been due to the artificially low rates
  • Has the fact the recovery was arguably the most anemic in US history also due to artificially low rates
  • Is the fact the US economy is now accelerating due to rates finally (and grudgingly) being raised?
  • There has been an unprecedented amount of gov't backed debt sold with these low rates. Is it a bubble and will it pop slow as investors sell these bonds? Or will they pop it and sell in a rush?
  • Where does this money go then? Is this the reason for the US stock market's strength as investors move from bonds to equities?

When this experiment is over of course the answers will be crystal clear (everything is in hindsight). One thing is clear though, the rate spread has never been this large and things like this affect investor behavior. It also adds a certain layer of unpredictability in credit markets and when you have a market that size, sudden ripples there can cause major waves across other asset classes.

The Fed is now playing catch with rates…..a raise now is virtually certain.

This article was written by

Todd Sullivan profile picture
Todd Sullivan is a Massachusetts-based value investor and Co-Founder and General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer supports his original thesis. His blog features his various ideas and general commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain's NY and others. He has also appeared on Fox Business News and is a contributor. He has twice presented at Bill Ackman's Harbor investment Conference and is a regular presenter at the Manual of Ideas "Best Ideas" conferences. Visit his sites: ValuePlays ( , Rand Strategic Partners (

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