The Lower Rates Lever Is Broken

Back on July 31st, we flagged the terrifying possibility that the Fed’s most powerful tool — rate cuts — no longer works…

The First Fed Dissent Since ’93…

From September to December 2024, the Fed cut 100bps, yet the 10-year yield rose ~71bps and mortgage rates climbed from ~6.09% → ~6.74%.

The lever snapped: easing made borrowing tighter. Powell’s refusal to cut through summer wasn’t prudence, it was fear — fear of proving the Fed had lost control of the long end.

Now fast-forward. The Fed finally cut again… and within days, mortgage rates jumped 15bps to 6.37%. Exactly the same paradox we warned about.

The more Powell pulls, the less responsive the system becomes. The illusion of control — the very foundation of central banking — is fracturing in public view.

This is not about a blip in mortgage markets. It’s about the market openly disobeying the Fed. The “risk-free” benchmark is breaking free of policy gravity.

That’s why dissent is emerging inside the FOMC — and why Powell has been so hesitant: not because the economy couldn’t “handle” cuts, but because he knows another upside move in yields exposes the impotence of their playbook.

This Fed division is the clearest tell yet: policymakers don’t just disagree on pace—they disagree on the direction.

Some want cuts, some want hikes, and others want to freeze. That kind of fragmentation screams one thing: the Fed has lost its compass.

Now layer this onto what we’ve just discussed: September–December 2024’s “Powell pivot” cut 100bps, and the long end rebelled—yields climbed, borrowing costs tightened.

Powell stalled for months, clearly fearing another rebellion. And now, after a fresh 25bps cut, the exact same thing happened—mortgage rates spiked higher the very next day.

Implication: The Fed is pushing on a string. Policy at the short end is diverging from the long end, exposing the limits of Fed control. A fractured Fed + a bond market revolt = systemic fragility.

Gold and silver thrive in this vacuum because they are the only collateral not bound by Powell’s credibility crisis.

Why cuts are pushing long rates up

Inflation tolerance → higher term premium. Cutting into ~3% Core PCE signals tolerance for inflation. The market reads this as prioritizing growth/debt service over price stability → investors demand more yield to hold duration.

Fiscal dominance / buyer strike. Treasury supply is surging while natural buyers are shrinking. Foreign official holdings are being liquidated, banks are scarred by duration losses, and RRP is nearly drained. The marginal buyer extracts higher yield.

Volatility & MBS convexity. A bear steepener forces MBS hedgers to dump duration, widening spreads. Result: mortgage rates spike higher even as policy rates fall.

Plumbing stress. Negative swap spreads, wide SOFR/OIS, and thin liquidity amplify the divergence. Cuts ease the front end, but the long end revolts.

What it means

• Policy transmission is broken. Cuts no longer flow into cheaper household/real-economy finance; they can send real borrowing costs in the opposite direction.

• Curve steepens for the wrong reasons. Not optimism—risk premium and issuance pressure.

• Reflation by coercion. Fed represses the front end while the bond market re-prices the back end—classic fiscal dominance.

Knock-ons

• Housing affordability worsens despite “easing” → household stress escalates.

• Treasury auctions face bigger tails; long-end volatility infects bank/MBS balance sheets.

• Fed credibility erodes: if cuts lift borrowing costs, the anchor is gone.

Metals takeaway

A Fed that cuts and still watches real borrowing costs rise is a Fed that’s boxed in.

That mix—policy impotence, rising term premium, fiscal dominance, and liquidity strain—funnels capital into gold and silver, the only collateral that transcends broken transmission and fragile balance sheets.

Liquidity & Funding Stress

Silver & Gold Market Stress

Global Yield Stress

Japan: The Weak Node Snaps

Now, zoom out: Japan is showing us what happens when that same dynamic metastasizes at the sovereign level.

Japan is the world’s 4th largest economy, the largest foreign holder of Treasuries, and the epicenter of the global carry trade.

Their debt-to-GDP is a staggering ~240%. For decades, the BoJ could paper over imbalances by suppressing yields at home and exporting capital abroad. That fragile equilibrium is breaking.

Japanese bond yields have exploded into record territory, forcing equity markets down -2.5% in a single session. The BoJ is boxed: defend bonds and the yen collapses, defend the yen and the bond market buckles. They cannot defend both.

This is the exact “weak node” we’ve been pounding the table on:

• Treasury dependence. Japan’s liquidation risk isn’t abstract — when foreign official holdings shrink, U.S. financing costs rise.

• Carry trade unwind. Global leverage is stacked on the assumption that the yen will stay pinned. Every basis point higher forces unwinds that reverberate across dollar funding markets.

• Sovereign fragility. With debt loads this large, higher yields = insolvency risk. Japan isn’t just a domestic story; it’s a trigger for systemic stress across the hyperconnected financial system.

What it means

• The domino effect. Japan breaking forces ripples through Treasuries, FX, and credit — pulling at the very plumbing of global markets.

• Fiscal dominance on display. When debt overwhelms, “policy” becomes defense. The BoJ is trapped, just as the Fed is beginning to be.

• The U.S. mirror. What’s happening in Tokyo today is a preview of what happens in Washington tomorrow if deficits and debt issuance keep surging unchecked.

Japan’s Long-End Rebellion in Disguise

Japan’s “cooling CPI” isn’t real disinflation—it’s rice math. Core CPI slowed to 2.7% because rice inflation fell from 100% YoY to ~70%.

But beneath that statistical mirage, the bond market is revolting. Yields keep pressing higher, stocks are selling off, and the BOJ is caught in the same trap we’ve been mapping for the Fed: short-end policy vs. long-end reality.

Hiking won’t grow more rice. Just as cutting Fed Funds won’t lower U.S. mortgage rates. In both cases, the long end is breaking free of policy gravity.

Japan shows the extreme: defend the bond market and you crush the yen; defend the yen and yields spike, detonating equities. The illusion of control vanishes.

Implication: Japan is the weak node of the global system not because of rice, but because it proves that once the long end stops obeying central banks, debt service costs spiral, credibility cracks, and collateral demand shifts to gold and silver—the only assets immune to policy failure.

The Broken Lever and the Only Escape

The Fed’s most powerful lever—rate cuts—has snapped.

Instead of easing, cuts now push long rates higher, tightening mortgages and debt service just as the economy slows.

Policy transmission is broken. The same fracture is visible in Japan, where the BOJ can’t defend the bond market and the currency at once.

This isn’t isolated—it’s systemic. A hyper-indebted, hyper-interconnected global economy is now colliding with fiscal dominance: record issuance, shrinking buyers, and term premia exploding across sovereign markets.

Central banks are boxed in. They can’t stop easing without breaking growth, and they can’t keep easing without the long end rebelling.

That paradox funnels capital into the only base layer collateral left standing: physical gold and silver. 

They’ve outlasted every fiat system in history. For just 54 years, debt replaced them as the foundation. Now, as the debt-based architecture crumbles under its own weight, the system naturally reverts to assets with intrinsic value.

Implication: We’re not just in a bullish setup—we’re at the dawn of an unprecedented re-pricing, where gold and silver reassert themselves as the ultimate anchor in a broken system.

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Luke Lovett
Cell: 704.497.7324
Undervalued Assets | Sovereign Signal
Email: [email protected]

Disclaimer:
This content is for educational purposes only—not financial, legal, tax, or investment advice. I’m not a licensed advisor, and nothing herein should be relied upon to make investment decisions. Markets change fast. While accuracy is the goal, no guarantees are made. Past performance ≠ future results. Some insights paraphrase third-party experts for commentary—without endorsement or affiliation. Always do your own research and consult a licensed professional before investing. I do not sell metals, process transactions, or hold funds. All orders go directly through licensed dealers.