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A Short History of 21st Century Fed Funds Rates

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Monday, March 20th, 2023

There’s no mystery what the pinnacle moment of this trading week will be: the latest Federal Open Marketed Committee (FOMC) meeting, beginning tomorrow and finishing with a new report on interest rate policy, including whether a new Fed funds rate increase will be forthcoming. We’ve seen a wide range of trading over the past month, depending on the index — from +4.8% on the Nasdaq to -7.2% on the small-cap Russell 2000 — but in the pre-market this morning we’ve buoyed into the green: the Dow +96 points, the S&P 500 +10 and +24 points on the Nasdaq.

Over the weekend, Swiss bank major UBS (UBS - Free Report) bought out flagging Zurich-based investment bank Credit Suisse (CS - Free Report) for $3.2 billion (you’d be forgiven to react as if there’s a misplaced decimal point here, but yes — “only” $3.2 billion), which basically means UBS took over its competitor for “the price of the building.” Credit Suisse is the first high-profile investment firm outside the U.S. — indeed, outside the San Francisco area — to go under since banks like Silvergate, Silicon Valley Bank and Signature Bank suffered a similar fate.

This brings us back to the Fed’s FOMC meeting this week, and whether — with banks now failing in a sign that something in the economy has “broken” now that the Fed has cranked up interest rates +4.5% in the past year, and drained half a trillion dollars in assets off its balance sheet — a pause in current rate-hike activity is warranted. The Fed is still actively fighting inflation, as of Fed Chair Powell’s and other voting Fed members’ latest public comments ahead of the blackout period prior to this week’s meeting. The big question is whether the Fed will pause in light of current banking events.

The last time the Fed chose not to raise interest rates was back in January of 2022. The last time we were at +5% on the Fed funds rate was back in September 2007, back when the Fed took down rates a half a point from +5.25%. The highest interest rates we’ve seen this century was back in May of 2000, when Fed Chair Alan Greenspan oversaw the height of the dot-com boom. Not until the tech boom went bust — between March and November 2001 — did we see interest rates get taken down to +1.00%, where they stayed until June of 2004.

The Fed finally cut the Fed funds rate all the way to zero during the tenure of Fed Chair Ben Bernanke in December 2008, following the financial crisis that saw bank contagion based on risky mortgage-based assets and little regulation in the banking industry. We stayed at 0.00-0.25% — at the time, an unprecedentedly accommodative policy of cheap cash available — until seven years later, when we incrementally saw 25 bps hikes over the course of the next two years, until December 2018. Fed Chair Powell then instituted a “mid-cycle adjustment” during the Trump administration’s trade war with China, and then brought rates back down to 0-0.25% upon the Covid pandemic.

Basically, for the first time in 15 years, we’re now faced with a longer period of higher interest rate levels — though nowhere near the near-20% highs from around 40 years ago, which were necessary due to lax inflation fighting through a large portion of the 1970s. Powell insists we not go that route again, at least during his tenure, so the dot-plot still shows a 25 bps hike coming on Wednesday. And a quarter point here or there won’t likely be the difference between a solvent and a failing bank, but the pause remains a distinct possibility this week.

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