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BEING STREET SMART
by Sy Harding
When Will the Fed Stop raising Interest rates? (May 11, 2005)
Obviously the Fed’s eight rate hikes since last June, at “a measured pace” of .25% each time, have not come close to slowing the advance of inflation that began in 2001.
The following table shows how the Consumer Price Index (CPI) has been rising since 2001.
|
Year |
Rate of CPI Inflation |
|
2004 |
3.3% |
|
2003 |
1.9% |
|
2002 |
2.4% |
|
2001 |
1.6% |
|
2000 |
3.4% |
|
1999 |
2.7% |
|
1998 |
1.6% |
The table indicates why we are concerned that the Fed is getting behind the inflation curve, and current forecasts of how soon they can stop raising rates are unrealistic. Inflation is out of the bottle and eight rate hikes have not made a dent.
The last time that CPI inflation rose from 1.6% to 3.4% (see above table) from 1998 to 2000, the Fed began raising interest rates in June 1999. That time it only had to raise the Fed Funds rate five times, and a total of only 1.75% before inflation began declining again. However, the Fed Funds rate was at 4.75% at its first hike in 1999, and 6.5% after it made the last hike in the series.
This time, the Fed Funds rate was at only 1.00%, a 45-year low, when the Fed made its first rate hike last June, and after eight .25% hikes, it is still at only 3.0%.
At some point are economists going to realize that short-term rates will have to be in their typical area of 5.5% to 6% before the Fed will again have inflation under control? (The consensus now is for the Fed to be able to halt the hikes when they reach 3.5%).
For those who might think a 5% or 6% Fed Funds rate would be absurd, the average level from 1990 to 2001 was approximately 5.25%.
For those who would like to draw their own conclusions from the data, the following table shows all of the Fed’s hikes and cuts in the Fed Funds rate for the last 15 years.
|
Date |
% Hike |
% Cut |
Level |
|
2005 |
|||
|
May 3 |
+ .25% |
3.00% |
|
|
March 22 |
+ .25% |
2.75% |
|
|
Feb. 2 |
+ .25% |
2.50% |
|
|
2004 |
|||
|
Dec. 14 |
+ .25% |
2.25% |
|
|
Nov. 10 |
+ .25% |
2.00% |
|
|
Sept. 21 |
+ .25% |
1.75% |
|
|
Aug. 10 |
+ .25% |
1.50% |
|
|
June 30 |
+ .25% |
1.25% |
|
|
2003 |
|||
|
June 25 |
- .25% |
1.00% |
|
|
2002 |
|||
|
Nov. 6 |
- .50% |
1.25% |
|
|
2001 |
|||
|
Dec. 11 |
- .25% |
1.75% |
|
|
Nov. 6 |
- .50% |
2.00% |
|
|
Oct. 2 |
- .50% |
2.50% |
|
|
Sept. 17 |
- .50% |
3.00% |
|
|
Aug. 21 |
- .25% |
3.50% |
|
|
June 27 |
- .25% |
3.75% |
|
|
May 15 |
- .50% |
4.00% |
|
|
Apr. 18 |
- .50% |
4.50% |
|
|
Mar. 20 |
- .50% |
5.00% |
|
|
Jan. 31 |
- .50% |
5.50% |
|
|
Jan. 3 |
- .50% |
6.00% |
|
|
2000 |
|||
|
May 16 |
+ .50% |
6.50%** |
|
|
Mar. 21 |
+ .25% |
6.00% |
|
|
Feb. 2 |
+ .25% |
5.75% |
|
|
1999 |
|||
|
Nov. 16 |
+ .25% |
5.50% |
|
|
Aug. 24 |
+ .25% |
5.25% |
|
|
June 30 |
+ .25% |
5.00% |
|
|
1998 |
|||
|
Nov. 17 |
- .25% |
4.75% |
|
|
Oct. 15 |
- .25% |
5.00% |
|
|
Sept. 29 |
- .25% |
5.25% |
|
|
1997 |
|||
|
Mar. 25 |
+ .25% |
5.50% |
|
|
1996 |
|||
|
Jan. 31 |
- .25% |
5.25% |
|
|
1995 |
|||
|
Dec. 19 |
- .25% |
5.50% |
|
|
July 6 |
- .25% |
5.75% |
|
|
Feb. 1 |
+ .50% |
6.00%** |
|
|
1994 |
|||
|
Nov. 15 |
+.75% |
5.50% |
|
|
Aug. 16 |
+ 50% |
4.75% |
|
|
May 17 |
+ .50% |
4.25% |
|
April 18 |
+ .25% |
3.75% |
|
|
Mar. 22 |
+ .25% |
3.50% |
|
|
Feb. 4 |
+ .25% |
3.25% |
|
|
1992 |
|||
|
Sept. 4 |
- .25% |
3.00% |
|
|
July 2 |
- .50% |
3.25% |
|
|
Apr. 9 |
- .25% |
3.75% |
|
|
1991 |
|||
|
Dec. 20 |
- .50% |
4.00% |
|
|
Dec. 6 |
- .25% |
4.50% |
|
|
Nov. 6 |
- .25% |
4.75% |
|
|
Oct. 31 |
- .25% |
5.00% |
|
|
Sept. 13 |
- .25% |
5.25% |
|
|
Aug. 6 |
- .25% |
5.50% |
|
|
Apr. 30 |
- .25% |
5.75% |
|
|
Mar. 8 |
- .25% |
6.00% |
|
|
Feb. 1 |
- .50% |
6.25% |
|
|
Jan. 9 |
- .25% |
6.75% |
|
|
1990 |
|||
|
Dec. 18 |
- .25% |
7.00% |
|
|
Dec. 7 |
- .25% |
7.25% |
|
|
Nov. 13 |
- .25% |
7.50% |
|
|
Oct. 29 |
- .25% |
7.75% |
|
|
July 13 |
- .25% |
8.00% |
We can hope those who are predicting the Fed’s job will be done when it gets the Fed Funds rate up to 3.75% will be right.
However, as the table shows, it was extremely unusual that the Fed had to drop the rate all the way from 6% in 2001 to 1%, a level not approached since 1960, to get the economy out of the 2001 recession.
From the table it looks like it would be just as unusual if inflation can be halted with rate hikes back up to only 3.75%. Hiking modes at least since 1990, have not ended until the rate was at 6%. We marked the end of those hikes with an ** in the table.
It’s also interesting that whether the Fed was cutting rates or hiking them, it almost always had to be more aggressive at some point, and move to 1/2% and even 3/4% hikes, before it was satisfied.
A table of the previous 16 years, from 1974 to 1990, would be even more troublesome as the Fed Funds rate ranged from 5% to 17%.
Feb. 3, 2006 update:
The Fed raised interest rates again this week, the 14th rate hike since June, 2004, raising the Fed Funds rate to 4.5%.
Each time the Fed hiked the rate, the economists would simply add on another 0.5% to their forecasts, and remain way behind the curve (as was the Fed). No one seemed to bother with any research, but just kept following the Fed's moves with a fractionally higher forecast.
In early 2005, the consensus forecast was that the Fed would be finished when they had the rate up to 2.5%.
At the time of the above newsletter, May 11, 2005, the Fed had raised the rates a few more times, a total of 8 at that time, and the Fed Funds rate was up to 3.0%. And, as noted in the article, economists were forecasting the rate hikes would stop at 3.5%.
With this week's 14th hike, the rate is now at 4.5%, and sure enough this week the consensus of economists' forecasts, which had most recently been that the Fed would stop at 4.5 to 4.75%, raised their forecasts to 5.0%, with a few now saying 5.25% might be possible.
Getting very close to the 5.5% to 6.0% we forecast in the May 11, 2005 newsletter, which looked so preposterous at the time.