Fed Rate Hike Fears and Crystal Balls

1 December 2015

I have been asked a lot about this the past few weeks - what are the chances of a US interest rate increase in December?

In fact, it seems to be on everyone’s radar - and a concern as to the effect this will have on the US economy, on global markets ... and of course, the Rand.

If you read any financial reports, every bit of US financial news and data (be it employment figures, inflation rates, growth data, manufacturing figures, durable goods, etc) is being closely scrutinized to give some hint as to the decision the Fed makes on 16 December.

I have covered this subject before, but it still amuses me how firmly the majority of persons believe that Central Banks are in control of a country’s economy, and that one of the most powerful levers they have at their disposal is interest rates.

(Maybe even Central Bankers believe this themselves).

But this is not the truth.

The fact is...

Central Banks don’t control interest rates at all.

The market does.

The market has both historically and will in future dictate to Central Banks what the future interest rate will be.

Skeptical?

If so, I can understand. So was I, until I saw the facts presented graphically by Robert Prechter of Elliott Wave International many years ago, which proved indisputably who controls the interest rate market.

Here’s the proof.

Let’s start on the local front. Below is a chart depicting the change in the South African Repo rate (in red) and the local 3-month Treasury Bill Yield. This rate is set by the market, being the rate at which it is prepared to lend money to the government.

Click to enlarge
This paints a revealing picture.

As can be clearly seen from the above, which dates back to 1999, the change of the Repo rate by the MPC’s has always followed the change in the yield on 3-month Treasury Bills.

When market rates have risen, the MPC has been forced to raise rates. And when they have peaked and started falling, the MPC has dropped rates, and has had to follow the market all the way down.

Last month’s 25bps increase was taken as a surprise to the market, but it should not have been, if you look at this Chart.


So, this might work for South Africa, but what about other countries, like the USA – surely the Fed’s in control of this huge economy?

Well, the below Chart might make you think otherwise…

Click to enlarge
And voila! This shows precisely the same picture, with the US Fed merely following the 3 Month T-bill market, habitually adjusting the Fed rate in line with what the market has already done.

And as can be seen, when the Fed dropped rates to practically zero in December 2008, guess what?

The market had already told them this needed to be done by bidding T-bill yields to zero.


Pretty revealing, isn’t it?!

A simple, powerful tool to predict future interest rate moves
...merely by look at the present 3 month T-bill yield!

So, what does this tell us of the chances for a rate increase later this month?

Well, the 3 month Treasury Bill rate is presently sitting at 0.15% compared with the current Fed funds rate of 0.25%.

Verdict:

Unless something dramatically happens the next week or two to push T-Bill yield rates to around 0.5% (more than treble current rates) the US Fed will keep rates unchanged!

This “revelation” is fully in line with the Elliott Wave Principle – that mass social mood drives markets, and that there is nothing that any government can do about it.

And, of course the reaction from the markets will be in line with market sentiment patterns up to that point.

Expect an interesting ride for the Rand the next couple of weeks.

To your success~

James Paynter

P.S Pretty incredible, isn't it? I would love to hear your comments and feedback. Please use the form below to let me know what you think.

P.P.S. If you have Rand exposures, and are stressed as to what to do, let us show you what the current market patterns are showing... Try out our forecasting service risk free for 14 days

16 December 2015 Update:
As of yesterday, the 3-month Treasury Bill rate is at 0.25% after hitting 0.29% last week. This shouldn't be enough to force rates higher, but the Fed might think otherwise, and want some ammunition for next year. Tonight will tell. JP