Market is more negative than the Fed -

The relationship between the Fed funds rate and short Treasury yields is usually very tight. The 3-month bill rate will be only slightly above or below the Fed funds rate. If it is above the Fed funds rate any significant amount, the Treasury market is saying that they exact that the Fed will raise rates. If it is below the Fed funds rate, the market expects a rate cut.

The differences between the Treasury yields and Fed funds are now at levels well beyond the norm. The market is stating that they expect that this recession is going to be much worse than the Fed is forecasting and have thus driven down rates. Just as important, there is a significant flight to quality. With more hedge funds have trouble and the mortgage market in disarray, the demand for Treasuries especially on the run issues is significantly greater than the current supply. Three-month Treasury yields are now below 1.5% so at a 150 bp discount to the Fed funds. The Fed is behind the curve.

The relationship was closed after the last Fed cuts but recent events have caused more quality flight. Watch these numbers closely.