Fed Funds: Typical Cycle

This chart below illustrates the average change (blue line) in the fed funds rate following a major bottom. While the last Fed tightening cycle (gold dashed line) fell a touch short of average, this tightening cycle has already witnessed a run that is a touch more than average — because we started from such unusually low levels (1%).

Consider how unusual this Fed cutting and tightening cycle is:

Fed_funds_1


Source: Chart of the Day
(updated through July)

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Discussions found on the web:
  1. yc32 commented on Aug 8

    What if one year from now, we realize that Fed should have finished at 4.75%? Ever since May, a lot of people were criticizing Feb for not doing enough, while a flat/inverted yield curve already indicated the high possibility of overshooting.

    If anything, with tightening from ever central bank, and excess capacity built up in China, commodity and oil induced price increases will be contained by economic slowdown.

  2. Mike M commented on Aug 8

    It’s funny how we market participants focus so myopically on the fed funds rate when open market operations will make the true difference in price inflation. The money supply has been expanding at very high rates for years now. I wonder what helicopter Ben is likely to do when faced with the unavoidable (and necessary) oncoming recession?

  3. Bryan Gomez commented on Aug 8

    Its just like listening to Jon Bon Jovi and liking it after hearing it for ten times. The more times you listen to it, the more you like it. The more you like it, the more you want to increase the volume. Until your ears become bored with that volume and the next glam rock band you listen to, your ears would want it even louder.

    Check out the first time the Fed Funds rate went to a new low. I think it broke down to 3% some 20 years ago. After reaching new lows, it rapidly went to 6%. We know that the Fed moves in trends but at that time, going from 3% to 6% was a very long stretch of continuous raises. After reaching six percent, the Fed went range trading for months which analysts would describe as the limbo or purgatory(if you wish).

    Same as Joseph Ellis, I wouldn’t be surprised if the second half of this decade would mean higher rates.

  4. blaze commented on Aug 8

    Hey Barry, what do you think of PIMCO’s thesis that corporate profits are going to be replaced by labor wage hikes, and thus inflation will be neutralized?

  5. khare commented on Aug 8

    to his credit – ben has been contracting the supply of M2 for sometime. recently he did fire up the printing presses and kick off m2 again so it’s growing again.

    and today the rate cycle has come to an end. with m2 growing again and the rate cycle at an end I can only assume he knows the recession is around the corner and will start cutting again very soon.

  6. me commented on Aug 8

    It’s funny how we market participants focus so myopically on the fed, when the market sets rates and the fed follows – Jim Rogers

  7. S commented on Aug 8

    yc32:

    I had similar thoughts, except I think it will take about 7 weeks before people start asking why it took the FED so long to stop tightening.

    GDP growth decelerated fast from Q1 rate of 5.6% to 2.5% in Q2. (Work through that math in an $11 trillion economy!)

    Anyway, if the deceleration continues and we print a GDP growth number with a “1” handle this quarter, the FED will likely move into easing mode before the end of the year. It’s funny, becauase I was watching the Fed Funds futures traders on CNBC today and none talked about an easing so soon, so I may be way off base.

  8. More Charts commented on Aug 8

    FYI – Chart of the Day Plus – Chart of the Day’s premium service – has a great series of charts that focus on the Fed Funds rate and how it relates to various markets.

  9. Matt Robinson commented on Aug 8

    Yes, the Fed has raised the target rate quite a bit more rapidly than in past cycles. Are we supposed to infer that “they” have thus overdone it? It is all about context. The degree that short term rates have reason are as much a product of the abnormally (in the context of the time period quoted in the chart) low level from which they have come. Obviously, this is affected by the extent to which we had a historic asset bubble in the stock market, which is in turn……

    Alternatively, let’s take simplistic, exellent adventure, Bill and Ted:

    Fed funds rate rises significantly, surely has to end soon right?:
    http://research.stlouisfed.org/fred2/series/FF/118/Custom?cs=Large&crb=on&cosd=1977-01-01&coed=1979-01-01&cg=Go

    NO!!!
    http://research.stlouisfed.org/fred2/series/FF/118/Custom?cs=Large&crb=on&cosd=1979-01-01&coed=1980-04-01&cg=Go

    Rates still look low relative to:
    http://research.stlouisfed.org/fred2/series/FF/118/Custom?cs=Large&crb=on&cosd=1978-01-01&coed=2006-08-02

    Rates don’t look particularly low/high relative to:
    http://research.stlouisfed.org/fred2/series/FF/118/Max?cs=Large&crb=on

    What’s the context? Will the rise in rates strain some financing/leverage? Probably. What does this mean for either macro economic pictures or individual entities? Shrug

  10. Craig H commented on Aug 9

    A little anecdotal inflation news from the homeowners front in Florida.

    Yesterday, we had a board meeting at our condo. We’re having the roofs redone on two building, for $1.1 million dollars, half of which was covered by insurance, and the other half was assessed to the unit owners.

    Because of delays, both buildings couldn’t be done this summer, so the second building will be done next year. This brought up the issue of inflation in materials costs. Our roofer told us to be prepared to pay ten to fifteen percent more for materials next May because in his words, “oil is bonkers”. He’s facing increasing costs for materials and transportation. I’m hoping a recession will keep a lid on that…

    The subject of the condo’s insurance was brought up. We were told to expect a two-hundred and fifty percent increase in the annual premium to $400,000, and a one-hundred percent increase in the deductible to $1,000,000, next January.

    That represents an average $5,000 increase in annual costs per unit owner, or an average 25% increase in their monthly maintenance payments. Unit owners also have to deal with premium increases on their individual policies on their condos.

    I imagine that the same situation is taking place between the Carolinas and Texas.

    None of this is good for inflation. None of this is good for the housing market. None of this is going to be good for the stock market. But I’m sure the U.S. equity bulls will tell me that everyone will just pick up and move to Vegas.

  11. Craig commented on Aug 9

    I don’t know about hearing the fed, but Bon Jovi sucks no matter how many times you have to listen.

    And MAN Craig H, that REALLY sucks. It’s not like you can sell condos easily these days.

  12. Craig commented on Aug 9

    I don’t know about hearing the fed, but Bon Jovi sucks no matter how many times you have to listen.

    And MAN Craig H, that REALLY sucks. It’s not like you can sell condos easily these days.

  13. Craig H commented on Aug 9

    Craig,

    It sure does. And you can’t sell condos at all down here since Q1. But I have a plan to meet the increasing expenses. I add to my homebuilder puts whenever they bounce.

    Today the bell tolls for TOL (again).

  14. Cbr commented on Aug 9

    Monetary Base
    largest measure of money supply
    Aug 2006 vs. Dec 2005 + 1.25%
    Dec 2005 vs. Dec 2004 + 4%
    Dec 2004 vs. Dec 2003 + 5.4%
    Dec 2003 vs. Dec 2002 + 5.7%

    large slowdown

  15. Cbr commented on Aug 9

    Monetary Base
    largest measure of money supply
    Aug 2006 vs. Dec 2005 + 1.25%
    Dec 2005 vs. Dec 2004 + 4%
    Dec 2004 vs. Dec 2003 + 5.4%
    Dec 2003 vs. Dec 2002 + 5.7%

    large slowdown

  16. Craig commented on Aug 9

    LOL!
    I just checked out TOL……down 5.50%!

    Nice.

  17. Peter commented on Sep 21

    Quit your whining. Move out of FL if you don’t like hurricanes, bugs & humidity. This is a big country. Surely some Bigger Fool will buy your condo unit – probably someone from NYC.

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