There's a popular (and erroneous) assumption that lowering of the Federal Funds Rate (FFR) somehow simultaneously reduces broader market rates. This is not true, especially as it pertains to intermediate- to long-dated paper, as evidenced by observing historical patterns between the FFR and other offered market rates, such as U.S. Treasury Bonds.
I published a Research Highlight on December 6, 2023 on this subject. Its opening statement, "If market participants seem to be overly obsessed with the direction of the Federal Funds Rate (FFR), then we should dedicate a research highlight to its level over the past two decades.", aimed to focus attention of an apparent market participants' misunderstanding of how this monetary policy tool actually works within the economy.
The accompanying chart on this post illustrates the main point that was made in the December 2023 Research Highlight that, "the plain observation is that dramatic movements of the FFR did not highly correlate to dramatic movements in the long-term risk-free rate". Currently, the FFR is demonstrably lower than the 10-Year U.S. Treasury (UST) Bond Yield. Perhaps even more interestingly, over the past few months even while the FFR has been repeatedly lowered by the Federal Reserve, the 10-Year UST bond yield has been on the rise.
As we move forward through 2025, we expect to see continued dislocation between market yields (even beyond risk-free rate instruments) and the FFR. This is particularly anticipated when overall market risks are more acutely perceived by participants. These risks include, over-leverage, cash flow imbalances, and high refinancing rates - across both corporate and government balance sheets.
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