Fed funds history and the persistent weirdness of markets
Tuesday, January 22nd, 2008
Here’s a text file of fed funds averages stretching back to 1954. Note that while today’s three quarter percentage point discount rate cut was “the biggest since 10/84” (as reported by CNN) it was in fact much larger in relative terms, since at that time overnight rates were at roughly 10%.
Take a look at the history of fedfunds and you’ll see that interest rates and reality they reflect have historically whipped around a lot faster and violently than we’re grown used to in the last 10 years.
This Sunday, the NYTimes magazine repeated the idiot line that the economic cycles have smoothed out “because the Fed and modern managers finally understand how to manage/dampen economic cycles.” (Will dig out the correct quote when I’ve got time.)
Let’s be real. No man or machine can out-think or out-manage the millions of minds trying to out-profit (by increasing/speeding up purchases or sales) in the myriad markets — for gasoline, GOOG, toilet paper, loans, CPMs, fortune cookies, carpet — we all constantly shop in.
It’s been a lucky 20 year run, with the US economy powered by ever-lower interest rates that were sustained by foreign investment in Tbonds, low real energy prices and Walmart’s unstinting price-cutting. Those scenarios have run their course. And with everyone now fully invested in and on those baseline assumptions, there are no buyers left.