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Dispelling Recent Fed Funds "Myths"
I'm following chatter of media and friends about the imminent doom that may come from Fed Funds rates increases, and that the market perceives a higher chance that the Fed pull away from zero interest rate policy soon. First, 2 Fed Funds charts showing no evidence the market perceives a risk that the Fed changes its policy near term. In fact, quite the opposite, bets are being put on that support extension of zero interest rates. The past 2 weeks have most definitely seen increased expectations for lengthening of current policy.
March 2010 Fed Funds contract:
And January 2011 Fed Funds contract. Remember, the higher this goes, the lower the interest rates. 98.80 means expectation of a 1.2% effective fed funds. 95.00 would mean an expectation of 5% fed funds.
Now to the piece of "common sense" that says the market would fall when Fed stimulus reverses course. First, from a history of 1954 to present, with blue areas showing periods of rising interest rates. Followed by a 1970 to present snapshot (more relevant data set perhaps).
And 1970 to present:
To me, Fed hiking looks more like a bullish signal and Fed loosening is more unpredictable (for good reason, as it responds to contractionary periods). It almost seems like there is a conspiracy in the media to get people to sell this move up. Maybe that's a silly and paranoid presumption. Right?
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"It almost seems like there is a conspiracy in the media to get people to sell this move up. "
Dunno. Could be. Perhaps they need to sucker in a fresh bunch of shorts to drive this thing higher on the back of their covering - LOL!
Isn't unemployment a key factor into the decision/modeling? If slack in the labor markets continues being a problem, it's gonna be slow/steady (again) I am presuming.
Zero percent interest rates are a constant, gnawing reminder that the condition of the U.S. remains critical and highly abnormal.
Bernanke is scared. He knows things we don't, and he is still very frightened.
How do we know this? A Zero percent Fed Funds Rate.
If he had any confidence at all it would be at least 200 bps higher.
They're telling Americans to be confident, yet their actions in the market are biggest indicator of all to act extremely cautiously.
try again, this time overlay changes in top tax rates over the long term and if there is a correlation ask yourself which way are taxes headed in the near future ?
"To me, Fed hiking looks more like a bullish signal and Fed loosening is more unpredictable (for good reason, as it responds to contractionary periods). It almost seems like there is a conspiracy in the media to get people to sell this move up. Maybe that's a silly and paranoid presumption. Right?"
In the words of Fred Sanford, "You big dummy."
If you look at the last two busts, the Fed started dropping rates right after the market peaked and insiders were looking to unload.
Low interest rates prod the public out of CDs and T-Bills and into the market at exactly the wrong time. Conversely, rising rates, encourage the public to put their money in the bank, leaving stocks for the insiders (GS, JPM et al.) to buy at wholesale prices.
While you are correct that over the last 40 years rising rates have generally correlated with rising markets, I question whether that has any relevance today. Credit was still expanding over those 40 years, helping to fuel economic activity. Today, credit growth is contracting. The economy is going nowhere for a very long time. Stocks have yet to price this in.
Rates could stay low for quite a long time while credit contracts. It all depends on how much money the Fed wants to print. But if rates were to go up any time soon, money would have to move out of equities.
Thank you.