The markets are anticipating an interest rate increase at the next Federal Reserve meeting on economic policy and many could legitimately say that this anticipation is what drives the short-term rates higher.
However, history is on our side on this matter. As pointed out in previous postings, Federal Reserve rate policy always follows the actions of short-term rates as demonstrated in the last comparable cycle in interest rates from 1953 to 1980.
In the chart below, we have highlighted the recent spikes in the 3-month Treasury. At least in the last instances, the Federal Reserve followed with interest rate increases. Coming off of the latest 3-month Treasury spike, we have been sufficiently prompted as to what is likely to come.
Also on the chart is the 3-month Treasury spike that culminated on August 10, 2015. We’ve added this to highlight how Fed officials responded to such a dramatic change. In this case, Federal Reserve Bank of Atlanta President Dennis Lockhart came out on August 10, 2015 to say the following:
"I remain very disposed to September being a possible date for a liftoff [interest rate increase] decision (source: Schneider, Howard. “Fed 'close' to hiking rates, economy near normal: Lockhart”. Reuters. Monday August 10, 2015. link. accessed 3/13/2017.)
Soon after the spike in market rates, The period from August to mid-September 2015 saw market rates for the 3-month Treasury drop, delaying the policy shift to higher interest rates. The Federal Reserve increase didn’t come until December 2015 as rates spiked well beyond the August 2015 jump. Again, it wasn’t until the spike in rates was significant and sustained that the rate increase was implemented.
All things being equal, Federal Reserve policy follows the markets. If the trend is truly your friend then, for now, the trend is up.