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Look Who's Leading the Way on Interest Rates (It's NOT the Fed)

The notion that the U.S. central bank controls rates is a myth

by Bob Stokes
Updated: December 16, 2016

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[Editor's Note: The text version of the story is below.]

Many investors believe that the Fed determines the direction of interest rates. But our research shows otherwise.

On Dec. 2, our Elliott Wave Financial Forecast remarked:

What will the Fed do at its mid-month meeting? The September issue of The Elliott Wave Theorist provided ample evidence that central banks do not lead but follow market rates. Since market rates have risen, the Fed is likely to follow. Look for the Fed to raise its rates this month.

As you probably know, on Dec. 14, the U.S. central bank announced that it would raise the federal funds rate 0.25% to between 0.50% and 0.75%. It was only the Fed's second hike in a decade.

Granted, the Fed hinted of a tightening before the announcement. Even so, the premise on which we based our prediction also served our subscribers well in the past.

The September Theorist discussed a time period when market rates had started to fall. Here's a chart and commentary:

No one monitoring the Fed’s decisions can predict when T-bill rates will change, but anyone monitoring the T-bill rate can predict with fair accuracy when the Fed will change its funds rate. The Elliott Wave Financial Forecast demonstrated this ability in September 2007 by predicting that the Fed was about to lower its federal funds rate dramatically.

The aftermath is shown in this chart:

As you can see, the Fed's benchmark rate followed the T-bills rate lower.

This pattern maintained even during the dramatic period of double-digit rates in the late 1970s and early 1980s. … T-bill rates peaked four times in 1980-1982. Each of those peaks occurred a month or more before subsequent and reactive peaks in the federal funds rate. The Fed’s rate also lags at bottoms, [such as] the lows of 1980, 1981 and 1982-3.

So, the notion that the Fed controls interest rates is a myth.

Financial markets are governed by investory psychology, which expresses itself in repetitive price patterns at all degrees of trend. We call them, Elliott wave patterns.

Knowing these patterns can help you anticipate what's next for key financial markets.

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