Most everyone is familiar with the phrase: “Keep your eye on the ball,” which of course means — focus on what really matters.
Those who seek clues about the direction of interest rates believe the “ball” is their nation’s central bank.
For example, in the U.S., Federal Reserve announcements are the subject of countless financial headlines, like this one from Sept. 22 (Reuters):
Fed signals bond-buying taper coming ‘soon,’ rate hike next year
The assumption in most of these headlines is that the central bank determines the direction of rates.
However, if interest-rate observers kept their eye on what really matters, they’d be watching the bond market instead of the central bank. In other words, markets lead and central banks follow.
Sticking with the U.S., this chart and commentary from Robert Prechter’s 2017 book, The Socionomic Theory of Finance, provide elaboration:
[The chart] plots T-bill rates and the effective federal funds…