Fed cut its rates for the first time in 10 years in July and it is about to cut the rates at least by 25 basis points during its September meeting.

Usually, when Fed cuts the rates the bond yields should go up as the economy will expand instead of contracting. But why are the yields of the bonds so low?

  • 1
    $\begingroup$ Your statement "Usually, when Fed cuts the rates the bond yields should go up" looks peculiar $\endgroup$
    – Henry
    Sep 2 '19 at 7:54
  • $\begingroup$ If a variable changes, in either direction, by a small amount it can still be "low". There's no contradiction requiring an explanation. This question would probably be better as either a question about the level of a variable or a change in the level of that variable. It's better to pick one in order to make the question easier to understand. $\endgroup$
    – H2ONaCl
    Sep 3 '19 at 8:47
  • $\begingroup$ I think there is a misunderstanding of what the "yield" of a bond means. It is impossible by definition to expect that lowering the fed funds rate would increase the yield of bonds. $\endgroup$
    – jojobaba
    Sep 4 '19 at 6:26

Perhaps you are confusing bond prices with yields? When bond prices go up, payments relative to the price the bonds are purchased will go down, and thus by definition yields go down.

The Fed mainly controls rates through open market operations, and more recently quantitative easing. In short, when attempting to cut rates, the Fed purchases securities such as US government bonds and in turn injects Federal Reserve Notes into the system. This has the two simultaneous effects: it raises the prices of bonds purchased and thus lowers their yields, and increases the money supply, lowering interest rates.


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