Many of the pundits around today, probably don’t remember when the fed funds rate was 15%, the Prime Rate was 20% and the 30-year Treasury would fluctuate from 8% to 15% in one year alone, as it did in 1980.
Volcker’s chairmanship of the Fed was truly an interesting time, as he moved from the “monetarist experiment” (i.e. targeting the money supply) back to targeting the fed funds rate in August, 1982.
Today, at least in 2016, we seemed to be facing the complete opposite of the late 1970’s, early 1980’s, as the US investor has faced widespread deflation, a decade of equity returns from 2000 to 2009 that was more reminiscent of the 1930’s, and record low domestic bond yields as well “negative” interest rates in sovereign debt markets.
It took 36 years to come full circle from the 1970’s style stagflation and 8% annual inflation and commodity / gold inflation to the post-2008 deflation worries and bond crises that we’ve seen the last 8 years.
And that cycle maybe ready to change again…
The point of this blog post is that if we study Greenspan over the years, he typically wasn’t preemptive: monetary policy changes only occurred when he had the hard economic or capital market data (as in 1998) to justify the change in course. In 2000, many screamed he was late when Greenspan didn’t reduce fed funds until January, 2001, as the Tech bubble rapidly rippled through the economy. You could say the same about Bernanke too. It isn’t the job of the Fed or the FOMC to be central planners.
So what about next week’s December 13th – 14th FOMC meeting ?
Well, the FOMC might have to start being “preemptive”.
Steve Liesman had a pretty good interview with Bill Dudley, head of the New York Fed and his comments (see attached transcript) indicated that the FOMC needs to see the size of the President-elect’s and new Congress fiscal stimulus package, it’s composition, and what the fine print looks like. (http://www.cnbc.com/2016/12/05/cnbc-exclusive-cnbc-transcript-new-york-fed-president-william-dudley-speaks-with-cnbcs-steve-liesman-on-squawk-on-the-street-today.html) even though fed funds futures indicate a high probability that the FOMC will move another 25 bp’s next week, bringing the fed funds target to 50 bp’s.
This tells me that rather than wait for hard improvement in economic data, they might start to get out in front of the Trump economic growth and fiscal stimulus planned for 2017.
The only sharp improvement in terms of data has come from the consumer sentiment and confidence data. While other economic data has improved, it is hardly outside the range of the last 8 years.
You would think though, that with a 4.6% unemployment rate, if all this discussed fiscal stimulus hits the consumer and the economy as it might, at one time, the only carburetor is interest rates and the bond markets.
I still think the Treasury and high-grade bond markets will see a year like the Nasdaq did in 2001. There was 9-month, $101 billion of inflows to high-grade bonds as of Sept 30 ’16, after a 35-year bond rally.
(The Weekly Earnings Update will be out a little later this weekend – look for it a little later on Saturday, 12/10 or Sunday, 12/11).
Thanks for reading.