New Column up at The (08/11/06)


The Real Money column I mentioned yesterday has been moved to the (free) The side.

Its a summary of lots of Fed related research: When the Fed Stops Tightening.

Here’s an excerpt:

"1980 seems to be a dividing line when it comes to the Fed. In the majority of cases from 1980 forward, markets did rather well after the Fed finished. Prior to that year, markets were generally lower six and 12 months after a tightening cycle ended.
In October 1982, the Fed shifted its emphasis from money-supply measures and "nonborrowed reserves" to an explicit fed funds rate-targeting procedure. That could very well be part of the basis for the change in results after Fed tightening ends. (See: When Did the FOMC Begin Targeting the Federal Funds Rate? for more detail.)

My conclusion is that the context of the Fed hiking cycle is what matters most to markets. During secular bull markets, Fed tightening seems to cool inflation and allows markets to keep rising. During bear periods, the Fed cycle seems to stop just before a major economic slowdown begins. The decrease in revenues and earnings then pressures equity prices.

Let’s examine some of these other studies. InvesTech Research looked at market performance over the following three, six and 12 months after the end of a tightening cycle, from 1929 to 2000 . . ."

Go check out the full piece — I think it came out pretty well, and is surprisngly even handed.


When the Fed Stops Tightening
Barry Ritholtz, 8/10/2006 9:14 AM EDT

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What's been said:

Discussions found on the web:
  1. K commented on Aug 11

    There are a lot of people concluding the Fed is done? Are they? They may need to raise again after Nov. elections or ’07. Either way, the markets, S&P and Bonds, will know before any of us EVER will. Thanks.

  2. TonytheTiger commented on Aug 11

    Can you say that again!!

    I agree, the fed is not done doing their business yet.

  3. TonytheTiger commented on Aug 11

    Can you say that again!!

    I agree, the fed is not done doing their business yet.

  4. TonytheTiger commented on Aug 11

    Say that again!!!…I dare you!!

  5. muckdog commented on Aug 12

    Good column, BR. One thing about the current rate hike, is that even with the economy slowing, the unemployment rate is just at 4.8%. We’re at full employment. Interest rates are still relatively low. Inflation seems mostly contained outside of the energy sector. M2 isn’t going crazy here, either.

    Recession or soft landing? Lets hope we’re looking at a 1994 scenario this time.

  6. Guy commented on Aug 14

    The conclusion that the “Fed stops tightening when it sees the economy slowing dramatically”, means that the Fed always overshoots when setting interest rates. By artificially setting a market price for money, the Fed causes fluctuations in the business cycle. The remedy would be to allow interest rates to float. The Fed could set a target for money supply growth, and issue bonds to achieve that target. Interest rates could float to compensate for fluctuating demand.

    A floating rate would be self-correcting. For example, while the economy expanded, interest rates would rise as demand for money increased. The rising cost of money would slow growth before inflation could take hold. As growth slowed, interest rates would fall to stimulate demand before a recession could occur. I’m curious about arguments against this type of Fed policy.

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