The Fed’s rate lever is breaking as bond markets stop following its lead
For decades, the Fed stabilized the economy with one simple tool: interest rates. Raise them to cool inflation, and cut them to stimulate growth. But after years of massive government borrowing, post-pandemic inflation, and repeated stress inside the Treasury market, that system may no longer work the way Americans expect. Today, the Fed can cut rates while long-term borrowing costs stay elevated, mortgage rates remain high, and bond markets react as if the central bank is losing control of the financial systems most important lever. At the same time, it has also resumed expanding parts of its balance sheet again to support market liquidity, raising a bigger question on Wall Street: if emergency support is still needed during relatively calm periods, what happens during the next real crisis？ The Fed controls less than you think Most Americans are familiar with a simplified version of US monetary policy: the Federal Reserve sets interest rates, and when those rates move, the rest of the economy follows. What that framing leaves out is that Fed Chair Jerome Powell and the FOMC only directly control the federal funds rate, which governs overnight lending between banks and has no direct relationship to what a homebuyer pays on a 30-year mortgage,