SP500 vs Treasury Yields vs Federal Funds Rate
The past two times we saw the 3-month vs 10-year treasury yields invert and the Federal Reserve make drastic cuts to the Federal Funds Rate were during the 2000 dot.com bust and the 2008 financial crisis. Each were accompanied by significant stock market declines/crashes.
Today we have the 3-month and 10-year yields inverted(two inversions in less than a year) and a return to a period of a declining Fed Funds Rate. Meanwhile stocks have been pushing higher up until recently.
An inverted yield curve represents a situation in which long-term debt instruments have lower yields than short-term debt instruments of the same credit quality. The yield curve is a graphical representation of yields on similar bonds across a variety of maturities. A normal yield curve slopes upward, reflecting the fact that short-term interest rates are usually lower than long-term rates. That is a result of increased risk premiums for long-term investments.
When the yield curve inverts, short-term interest rates become higher than long-term rates. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession. Because of the rarity of yield curve inversions, they typically draw attention from all parts of the financial world.
I prefer to use the 3-month and 10-year bond yields and is what is represented in my indicator.
The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis. By law, banks must maintain a reserve equal to a certain percentage of their deposits in an account at a Federal Reserve bank. Any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall.
-A committee of the Federal Reserve sets a target federal funds rate eight times a year, based on prevailing economic conditions.
-The federal funds rate can influence short-term rates on consumer loans and credit cards.
-Investors also pay attention to the federal funds rate because a rise or fall in rates can sway the stock market.
The end-of-the-day balances in the bank's account, averaged over two-week reserve maintenance periods, are used to determine whether it meets its reserve requirements.2
If a bank expects to have end-of-the-day balances greater than what's required, it can lend the excess amount to an institution that anticipates a shortfall in its balances. The interest rate the lending bank can charge is referred to as the federal funds rate, or fed funds rate.
Today we have the 3-month and 10-year yields inverted(two inversions in less than a year) and a return to a period of a declining Fed Funds Rate. Meanwhile stocks have been pushing higher up until recently.
An inverted yield curve represents a situation in which long-term debt instruments have lower yields than short-term debt instruments of the same credit quality. The yield curve is a graphical representation of yields on similar bonds across a variety of maturities. A normal yield curve slopes upward, reflecting the fact that short-term interest rates are usually lower than long-term rates. That is a result of increased risk premiums for long-term investments.
When the yield curve inverts, short-term interest rates become higher than long-term rates. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession. Because of the rarity of yield curve inversions, they typically draw attention from all parts of the financial world.
I prefer to use the 3-month and 10-year bond yields and is what is represented in my indicator.
The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis. By law, banks must maintain a reserve equal to a certain percentage of their deposits in an account at a Federal Reserve bank. Any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall.
-A committee of the Federal Reserve sets a target federal funds rate eight times a year, based on prevailing economic conditions.
-The federal funds rate can influence short-term rates on consumer loans and credit cards.
-Investors also pay attention to the federal funds rate because a rise or fall in rates can sway the stock market.
The end-of-the-day balances in the bank's account, averaged over two-week reserve maintenance periods, are used to determine whether it meets its reserve requirements.2
If a bank expects to have end-of-the-day balances greater than what's required, it can lend the excess amount to an institution that anticipates a shortfall in its balances. The interest rate the lending bank can charge is referred to as the federal funds rate, or fed funds rate.
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