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Doomsday Indicator or Rare Opportunity

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Talking heads may share many characteristics whether they represent politics, finance or sports. One interpersonal feature that has been particularly relevant recently is hyper-dramatic events. “That team will never draft that player,” Fictional NFL commentator said team draft player.

The Fed and interest rate analysts currently find themselves in a similar dance. After the US Federal Reserve announced no change in rates last week, many people took to social media to hyperbolize and rant about how the Fed will never remove rates from 0% and how it could lead to an inevitable stock market crash. will cause.

same old song

Those who traded in the aftermath of the 2008 crash may be feeling some déj vu these days relative to the will-they-or-not-they mentality with the Fed raising rates by 0%. As equity markets hit new high after new high, analysts and social media users alike predicted the fed funds rate would never hit 0% again. And then the Fed raised rates several times between 2015 and 2018.*

SPXS&P 500 Index

Source: dxFeed Indexing Services (https://indexit.dxfeed.com)

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Can rates stay close to 0% for months and years? Of course! Will they be there forever? Although it is possible, there is no historical precedent. Since the inception of the Fed, sometimes rate cuts have been followed by hikes. Short 2YR Yield Futures currently represent around 0.175% in short-term interest rates. Buying S2Y futures would demonstrate a potential reversal to the historical norm, while selling them is the opposite.

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<h3>S2Y  Short 2YR Yield Index</h3>
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Source: dxFeed Indexing Services (https://indexit.dxfeed.com)

The mission of the Fed is not to burn down the house, as some talking heads may project, but to guide the financial markets in a way that usually commentators say, “Oh yes, this should be the place.”

*Data from https://www.federalreserve.gov/


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