How The Rates Are Sliced

What Most People Don’t Understand About Interest Rate Cuts

This is Porter’s Daily Journal, a free e-letter from Porter & Co. that provides unfiltered insights on markets, the economy, and life to help readers become better investors. It includes weekday editions and two weekend editions… and is free to all subscribers.

Editor’s note: Porter has turned today’s Journal over to Distressed Investing senior analyst Marty Fridson. ​​

Marty has a long background in trading, investing, and finance… Over a 25-year span with Wall Street firms including Salomon Brothers, Morgan Stanley, and Merrill Lynch, he became known for his innovative work in credit analysis and investment strategy.

Below, Marty shares some of the wisdom learned along the way. He offers up an analysis of how a reduction in interest rates by the Fed does not necessarily have the outcome for Treasury bonds that many in the financial community anticipate…

Marty offers up the details now…

We will not be publishing the Saturday Stock Screen and Sunday Investment Chronicles this weekend. Both will resume on September 6 and 7… And please note that with the markets closed on Monday, September 1, for Labor Day, we will not publish Porter’s Daily Journal.

The Fed’s interest rate prescriptions play prominently in discussions about financial markets, but recent news on the topic has been unusually sensational. 

It has included U.S. President Donald Trump’s unprecedented firing of Federal Reserve governor Lisa Cook and a lawsuit by Cook challenging the legality of her firing. The president has even spoken of firing Federal Reserve Board Chair Jerome Powell, labeling him a “stubborn moron.” For investors who previously found reporting on monetary policy dry and boring: Be careful what you ask for!

But to get the real facts you have to look beyond the headlines and see what the players post on social media to advance their agenda. In particular, a key rationale that’s been advanced for drastically cutting the federal funds rate – the target rate that now stands at around 4.5% – is that doing so will lower the federal government’s borrowing cost, saving taxpayers billions of dollars. On top of lowering mortgage rates for homeowners it sounds great, but it’s not really that simple.

Since January 17, 2025, the last trading day before the Trump administration took office, the yield on two-year U.S. Treasury notes has fallen by 61 basis points. The yield on those short-maturity issues closely reflects the Fed’s stance on the Fed funds rate (the overnight interbank lending rate) that it directly controls. So the debt market is signaling that it expects Powell and the other Federal Open Market Committee (“FOMC”) members to drop the Fed funds rate at their September meeting and possibly later on as well.

But the yield on the Treasury maturity most closely watched by investors – 10 years – declined by about one-third less over the same period, just 42 basis points. And in the longest maturity, 30 years, the government’s borrowing rate has gone up – by three basis points. 

That’s the market’s way of saying, “Hold on!”