Monetary Policy Since 1990

Comments

[Saheli]

Any chance you could link to a larger version of the image? It looks fascinating but is slightly difficult to read. Thanks! :-)

[Joe Loserman]

Brad,

All I can say is that looks like we have had one option for charging up the economy: fed fund rates. And it seems like it gets less and less effective all the time.

I've noticed a lot of people are now "depression blogging" as if the next depression is just around the corner, with deflation bringing us all down (good 'deflation + china', 'deflation + europe', 'deflation + brazil' etc..etc... every country turns up a helluva lot more hits than ever before).

What do you think about this stuff? Do you believe we're in a credit bubble, our banks are just a few steps away from massive failures via the derivatives market & that we're all going to be living in mud huts soon?

-Joe

[bakho]

I thought pushing the Fed rate higher than the 10 year bond was supposed to be a bad idea. Capital is still cheap.

[nate]

http://tinyurl.com/99bgd

The site above looks at the same graph over a longer time period.

It would be interesting to look at this graph in real terms since 1950-

Professor: didn't you post a paper at one point that talked about investors and their perception of real vs. nominal interest rates?

[Jonathan W. King]

My favorite yield curve toy is this site:

http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

So a funny thing happened right before Katrina struck; the long-term (i.e., 10-year) rate was 4.20%, while the 2-year rate was 4.06%, for a very, very narrow 14 point spread. Then something wacky happens, and now the 10-year rate is 4.09%, while the 2-year is down to 3.80% (as of today). Given the fact that these are all interpolated data, there could still be a lot of glitchiness in the daily time series, but the falls in the short term rates were really large and sudden, but now seem to be creeping back up. Is this what a hedge fund unwinding might look like? It looked to me like we were wihin weeks of having an inverted yield curve before Katrina, but now it's not so clear. If oil prices remain where they are now or go higher and spark inflation, I think we all know what the fed is going to do,
and the result is going to be a spectacular amount of pain.

[Bruce Ferguson]

I know this does not go here but can someone please tell me the protocol of this and how it relates to NOLA?
http://www.people.fas.harvard.edu/~reeves/papers/fema.pdf

[Bruce Ferguoson]

http://www.people.fas.harvard.edu/~reeves/papers/fema.pdf

[glenn hefner]

The market is thinking the hurricane could cause the Fed at least to pause the cycle, but I think the Fed sees hurricane-realted weakness as very temporary and keeps raising rates for the time being - due more to housing that anything else. They seem to welcome high petroleum prices, as it helps the Fed do they job by slowing the economy at the fringes, or so they say. They're not worried about the knock-on inflation aspects of higher petroleum prices. And frankly, medium and long term, deflation is still the main real concern, which is likely why long bond yields remain paltry and why there's still a good chance of an inverted curve.

[kharris]

JWK,

Yes, hedge funds among others. A reasonable thing to do when the Fed is hiking rates, as you undoubtedly know, is to be short short-dated coupons. When the Fed is engaged in a supremely transparent cycle of rate hikes with what is thought to be a fairly predictable end-point, strategies become pretty refined, based on specific timing of rate hikes. That may have bred an instance of too much confidence, so too little risk premium, in this particular trade. The possibility that this tidy little world would be overturned caused short-covering in short-dated notes. There is also probably some black-box programming built on the recent correlation between higher oil prices and lower coupon rates. Sprinkle in some panic, and you get those ugly stripes on the two-year chart.

[scorpio]

the 10-yr rate, which is determined by thousands of participants in the market, trades fairly regularly, which is to say, but for the Fed-induced panics of '94 and '98, a fairly determined slope down, probably based on widely-perceived market fundamentals. the fed funds rate, however, which is determined by 12 guys (really 1 guy, greenspan) trades the way an individual trades, shows all the hallmarks of a panic buyer and panic seller. get rid of these guys

[Jonathan W. King]

Scorpio writes:
>
> the fed funds rate, however, which is determined by 12 guys (really 1 guy,
> greenspan) trades the way an individual trades, shows all the hallmarks of a panic
> buyer and panic seller. get rid of these guys

I'm not sure I'd put it that way, but this is surely part of the reason why a lot of people watch the constant maturity two-year rate, The Fed does not delcare it, but it does affect it, and it's usually a less step-function-y (sorry) curve. Thanks to kharris for completely elucidating what likely happened last week.

[christo]

"so too little risk premium, in this particular trade. The possibility that this tidy little world"

So this is what le Greenspan was warning about at the latest Jackson Hole shrimp fest when he mentioned too much complancency due to the incipient Greenspan moral hazard. The expectations almost started unwinding in real time.

Now that we have seen the Bush's team crisis management in action, interest rates should start rising as people start demanding more premium for their risk?

Otherwise what has the nation gained due to Greenspan's hyper-low Commander-Toad-in-Chief's interest rates except more debt and more risk? The economy is still on water infused ground. But that's an insult to Commander Toad who always had the competency to pull it off. Don't want to be obscure, Commander Toad is a series of children's books.

[Barry]

Could this also be the unwinding of the high-inflation era rates of the 1970's and 80's? As the Cold War ended, and oil prices declined, people started to feel that we were in a period of smooth sailing, with lower risks.

[Ole Possom]

One very cynical explanation for the red line is this: if the Republican party is in power at election time, interest rates go down; if the Democratic party is in power, interest rates go up. While there are other factors at work, I hope, doesn't this statement have a high degree of correlation with the changes in the red line, if not causation?

[christo]

"so too little risk premium, in this particular trade. The possibility that this tidy little world"

So this is what le Greenspan was warning about at the latest Jackson Hole shrimp fest when he mentioned too much complancency due to the incipient Greenspan moral hazard. The expectations almost started unwinding in real time.

Now that we have seen the Bush's team crisis management in action, interest rates should start rising as people start demanding more premium for their risk?

Otherwise what has the nation gained due to Greenspan's hyper-low Commander-Toad-in-Chief's interest rates except more debt and more risk? The economy is still on water infused ground. But that's an insult to Commander Toad who always had the competency to pull it off. Don't want to be obscure, Commander Toad is a series of children's books.

[scorpio]

ole possum: u are so right. particularly at crucial junctures (1. clinton agenda on the ropes in '94, raise rates dramatically for largest bond losses in history, Dems lose Congress, 2. Gore wants to be president after 2 terms for Dems? no way, rates hiked from 3.0% to 6.5%, Gore loses as market and economy swoon in spring '00, Bush wins, 3. Bush in trouble?keep rates at 1% far longer than anyone thot possible, even after 9/11). Clinton and Dems aiding and abetting the hero-worship of Greenspan? disgusting

[glenn hefner]

One would think that as the Fed raises rates, the risk premium would also rise, particularly from such low levels. However, there's a competing school of thought - perhaps this is what is happening - that the risk premium would actually decline as market participants know the Fed will bail them out by cutting rates should anything bothersome transpire ... the infamous Greenspan Put.

[dragan]

correlation that ole was pointing to also predates 90s and AG.
it's held true(ish) for the much of 20th century. of course,
9/11 changed everything :-)

[gordon]

The graph would be even more interesting if Broad Money was plotted as well.