Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE - 31st Jan 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Today’s Fed Makes Volcker Look Timid

Interest-Rates / US Federal Reserve Bank Sep 30, 2016 - 03:17 PM GMT

By: John_Mauldin

Interest-Rates

Let’s look at the Fed’s (and other central banks’) magnitude of monetary manipulation in recent years and the very constrained maneuvering room they now have as a consequence.

Of course, it’s questionable whether they should even be trying to maneuver the economy to the degree that they are. The current problem is a direct result of mistakes made during and after the last financial crisis.


Two Charts: Bernanke Was More Extreme Than Volcker

Here’s a long-term chart of the federal funds rate, the Fed’s main policy tool:

The gray vertical bars represent recessions. You can see how the Fed has historically dropped rates in response to recessions and then tightened again when those recessions ended. I red-circled the drastic loosening and retightening under Paul Volcker in the early 1980s and Ben Bernanke’s cuts to near-zero in 2008.

To this day, the Volcker rate hikes are legendary. No Fed chair has ever done anything like that—before or since. You hear it all the time.

Problem: it’s not true.

Here’s the same chart again. This time with a log scale on the vertical axis. This adjusts the rate changes to be proportionate with percentage rises and falls. The percentage change between 5% and 10% is the same as between 10% and 20%, since both represent a doubling of the lower number.

Looking at it this way, the Volcker hikes are tame.

But the Bernanke cuts dwarf all other interest rate changes since 1955. Nothing else is even close.

Bernanke’s rate cuts were far, far more aggressive than Volcker’s rate hikes.

Why did Bernanke—et al.—cut rates to zero? Because moving rates up and down was all they knew to do.

The Fed Is Scared of Wall Street

Moving rates had always worked before. If it wasn’t working this time, the Bernanke-led Fed figured more of the same should do the trick. And it might have worked for a year or two. After that, though, the Fed was so scared of a negative stock market reaction that they kept rates artificially low for eight years.

Long-term low rates have decimated fixed-income returns of pension funds and retirement plans for the middle class.

Central banks all over the world did the same—and more. The suffering caused by this bone-headed policy has intensified for all these years. You may not be suffering yourself, but I bet someone close to you is. And I guarantee you that your retirement funds have suffered.

Now, the supposedly humming economy is going to suffer another recession in the not-too-distant future. What then?

The Fed Is Ready to Go Negative

For lack of anything else, the Fed is preparing to send interest rates below zero. That was clearly the message from Jackson Hole.

How in Hades did we get to a place where negative rates were considered a good idea? One of the most stupid ideas ever cooked up in academia is now seen as rational and globally applicable.

What should we do? There are not many options. There is no magic wand to get us to normal. If there were, I’m pretty sure the Federal Reserve would wave it at once, because I think everybody realizes that rates should already have been normalized—and that to do so now is going to be problematic.

We really have come to a place where there are no good choices.

Join Hundreds of Thousands of Readers of John Mauldin’s Free Weekly Newsletter

Follow Mauldin as he uncovers the truth behind, and beyond, the financial headlines in his free publication, Thoughts from the Frontline. The publication explores developments overlooked by mainstream news and analyzes challenges and opportunities on the horizon.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in