Real e Finance means business
The 'Helicopter
Economics Investing
Guide' is meant to help
educate people on
how investing choices
in the current
economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
Economics Investing
Guide' is meant to help
educate people on
how investing choices
in the current
economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
____________________________________
____________________________________
________________________________________________________________
The truth and nothing but...
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Past Recessions
Provide Insight
Into When the
Fed Will Raise
Rates
Provide Insight
Into When the
Fed Will Raise
Rates
The Federal Reserve left the fed funds rate in the zero to 0.25% range at
its March meeting. This is the 15th month that the Fed has maintained
rates at an all-time low. At the conclusion of the meeting the Fed
stated that it will keep rates near zero "for an extended period of time",
so no rate increase should be expected for at least several more
months. Examining how the Fed reacted to past recessions can provide
investors with some insight into when the Fed will actually change to a
more restrictive interest rate policy this time around.
According to the official record, the previous U.S. recession took place
between March 2001 and November 2001. This recession was unique in
that it is the only one in U.S. history where consumer spending didn't
drop and it was also one of the mildest recessions on record. Fed funds
bottomed at 1.00% in June 2003 - 19 months after the recession was
supposedly over. The backdrop was very low inflation. New reports of a
jobless recovery were common even in the fall of 2003 and there was
great concern at the time because the unemployment rate was at the
6% level (as opposed to 10% today). Fed funds remained at a low point
for 11 months. So the Fed started raising its funds rate 30 months after
the recession officially ended. If we optimistically assume that the
current recession ended in July 2009 because GDP turned positive in
the third quarter of the year, this would imply Fed funds would start
rising around January 2012.
The recession before the one in the early 2000s took place between
July 1990 and March 1991. Fed funds bottomed at 3.00% in September
1992 - 18 months after the recession officially ended. Jobless recovery
was also a big news item in 1993. Commentators noted that payroll
employment in the 7 previous U.S. recessions had increased on average
around seven percent in the two-years following the business trough,
but had barely budged in that time period after the 1990-1991
recession. The unemployment rate was around the 7% level. The
backdrop was declining inflation. The fed started raising rates in
February 1994, so the low rate was maintained for 16 months and this
was 35 months after the recession was declared to be over. This would
imply that the Fed will start raising rates around June 2012.
The prior recessionary period was the double dip recession that took
place between January 1980 to July 1980 and July 1981 to November
1982. This recession was actually created by Federal Reserve policy
and sent the U.S. industrial base into a decline from which it never
recovered. Inflation was high and at its peak, so interest rates were at
the start of a long-term decline. Fed chair Volcker kept raising Fed funds
rates until they reached 20%. They last time that they were that high
was October 1981. They were then lowered until they had fallen to
8.5% in December 1982. The funds rate was then raised until a new
lowering cycle began in September 1984. The funds rate bottomed at
5.875% in August 1986. High fed funds rates did not cause our current
recession, so this period of economic history is not necessarily relevant to
today's situation. The recession did take place at the beginning of a
multi-decade shift in interest rates and this is also occurring now,
although we are at the bottom of the cycle and not at the top like we
were in the early 1980s. Japan's experience since 1990 indicates that
rates can remain at or near their low point for well over a decade.
Before our current recession, the worst post World War II recession
occurred between November 1973 and March 1975. Inflation was high
and rising during this time period, so interest rates were generally
trending upward. Unemployment peaked at 9.0% in May 1975. The
concept of jobless recovery was an unknown phenomenon. The fed
funds rate reached a low of 4.75% in January and November 1976. The
Fed started a consistently more restrictive interest rate policy 21 months
after the recession ended. That would imply that April 2011 could be
the first Fed funds rate increase this time around.
Historical examination indicates that when the Fed starts raising rates
depends on when a recession occurs in the context of a longer-term
inflationary/deflationary cycle. When the inflation rate has already
been falling for a decade or more or is around its low point, it takes
longer for a rate rise than it does in a rising inflationary environment.
Two to three years after a U.S. recession has been declared officially
ended seems to be the norm before a tighter interest rate environment
begins regardless of the inflationary backdrop. If the Fed raises rates on
the short side of this number, this will indicate we are heading into
rapidly increasing inflation. If it takes more than three years, it will
indicate the possibility of grinding deflation as has occurred in Japan
since the 1990s. The first alternative is the proverbial devil and the
second is the deep blue sea.
Disclosure: None
Daryl Montgomery
its March meeting. This is the 15th month that the Fed has maintained
rates at an all-time low. At the conclusion of the meeting the Fed
stated that it will keep rates near zero "for an extended period of time",
so no rate increase should be expected for at least several more
months. Examining how the Fed reacted to past recessions can provide
investors with some insight into when the Fed will actually change to a
more restrictive interest rate policy this time around.
According to the official record, the previous U.S. recession took place
between March 2001 and November 2001. This recession was unique in
that it is the only one in U.S. history where consumer spending didn't
drop and it was also one of the mildest recessions on record. Fed funds
bottomed at 1.00% in June 2003 - 19 months after the recession was
supposedly over. The backdrop was very low inflation. New reports of a
jobless recovery were common even in the fall of 2003 and there was
great concern at the time because the unemployment rate was at the
6% level (as opposed to 10% today). Fed funds remained at a low point
for 11 months. So the Fed started raising its funds rate 30 months after
the recession officially ended. If we optimistically assume that the
current recession ended in July 2009 because GDP turned positive in
the third quarter of the year, this would imply Fed funds would start
rising around January 2012.
The recession before the one in the early 2000s took place between
July 1990 and March 1991. Fed funds bottomed at 3.00% in September
1992 - 18 months after the recession officially ended. Jobless recovery
was also a big news item in 1993. Commentators noted that payroll
employment in the 7 previous U.S. recessions had increased on average
around seven percent in the two-years following the business trough,
but had barely budged in that time period after the 1990-1991
recession. The unemployment rate was around the 7% level. The
backdrop was declining inflation. The fed started raising rates in
February 1994, so the low rate was maintained for 16 months and this
was 35 months after the recession was declared to be over. This would
imply that the Fed will start raising rates around June 2012.
The prior recessionary period was the double dip recession that took
place between January 1980 to July 1980 and July 1981 to November
1982. This recession was actually created by Federal Reserve policy
and sent the U.S. industrial base into a decline from which it never
recovered. Inflation was high and at its peak, so interest rates were at
the start of a long-term decline. Fed chair Volcker kept raising Fed funds
rates until they reached 20%. They last time that they were that high
was October 1981. They were then lowered until they had fallen to
8.5% in December 1982. The funds rate was then raised until a new
lowering cycle began in September 1984. The funds rate bottomed at
5.875% in August 1986. High fed funds rates did not cause our current
recession, so this period of economic history is not necessarily relevant to
today's situation. The recession did take place at the beginning of a
multi-decade shift in interest rates and this is also occurring now,
although we are at the bottom of the cycle and not at the top like we
were in the early 1980s. Japan's experience since 1990 indicates that
rates can remain at or near their low point for well over a decade.
Before our current recession, the worst post World War II recession
occurred between November 1973 and March 1975. Inflation was high
and rising during this time period, so interest rates were generally
trending upward. Unemployment peaked at 9.0% in May 1975. The
concept of jobless recovery was an unknown phenomenon. The fed
funds rate reached a low of 4.75% in January and November 1976. The
Fed started a consistently more restrictive interest rate policy 21 months
after the recession ended. That would imply that April 2011 could be
the first Fed funds rate increase this time around.
Historical examination indicates that when the Fed starts raising rates
depends on when a recession occurs in the context of a longer-term
inflationary/deflationary cycle. When the inflation rate has already
been falling for a decade or more or is around its low point, it takes
longer for a rate rise than it does in a rising inflationary environment.
Two to three years after a U.S. recession has been declared officially
ended seems to be the norm before a tighter interest rate environment
begins regardless of the inflationary backdrop. If the Fed raises rates on
the short side of this number, this will indicate we are heading into
rapidly increasing inflation. If it takes more than three years, it will
indicate the possibility of grinding deflation as has occurred in Japan
since the 1990s. The first alternative is the proverbial devil and the
second is the deep blue sea.
Disclosure: None
Daryl Montgomery