Major Crashes and the Federal Funds Rate
The last three major crashes and recessions have been preceded by a period of interest rate hikes by the Fed.
Each hike since the 1970s has gotten less and less far before the economy rolled over, calling for an emergency rate cut.
There are many reasons for this, including the deflationary impact of demographics and globalisation, as well as the ever increasing debt burden around the world.
This has caused us to want lower and lower rates, and to implement Quantitative Easing (QE) when the rates bottom out and cannot be reduced further.
Each time the rates are hiked. Each time the Fed eventually realises the economy cannot cope and performs an emergency rate cut.
Each time in the last three cycles, this came too late, and a crash ensued.
A trendline can be drawn to estimate where the rate hikes could go this time before history begins to rhyme. Incidentally, this is also what the bond market is pricing in right now.
With spiralling inflation, the Russia crisis and the energy prices, the pressure to hike rates is extreme. However, the economy is slowing, the earnings are stalling, and the stimulus is spent.
China's economy has already stalled to the point where its government has cut rates, even in the face of inflation.
When will the US be next?
Unless the Russia/Ukraine situation stabilises soon, this chart is probably conservative.
Each hike since the 1970s has gotten less and less far before the economy rolled over, calling for an emergency rate cut.
There are many reasons for this, including the deflationary impact of demographics and globalisation, as well as the ever increasing debt burden around the world.
This has caused us to want lower and lower rates, and to implement Quantitative Easing (QE) when the rates bottom out and cannot be reduced further.
Each time the rates are hiked. Each time the Fed eventually realises the economy cannot cope and performs an emergency rate cut.
Each time in the last three cycles, this came too late, and a crash ensued.
A trendline can be drawn to estimate where the rate hikes could go this time before history begins to rhyme. Incidentally, this is also what the bond market is pricing in right now.
With spiralling inflation, the Russia crisis and the energy prices, the pressure to hike rates is extreme. However, the economy is slowing, the earnings are stalling, and the stimulus is spent.
China's economy has already stalled to the point where its government has cut rates, even in the face of inflation.
When will the US be next?
Unless the Russia/Ukraine situation stabilises soon, this chart is probably conservative.
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