Posts filed under “Federal Reserve”
One of the oldest rules on Wall Street is, don’t fight the Fed. When the Federal Reserve is cutting rates, you want to be long equities, and when it is tightening, get out of the way. This has been a cause for concern since the Fed began talking of tapering its program of quantitative easing and ending its zero interest-rate policy.
But the knee-jerk response to an over-simplified rule of thumb might be wrong. When we look at the actual data — what happens to stocks when rates rise — we find a very different set of results than this heuristic suggests. Before I get to the numbers let’s look at both the positive and negative sides of increasing rates.
It is understandable that there is concern with a rising-rate environment. Often, higher rates signal an overheating economy, higher costs of credit to purchase goods and services and a potential profit squeeze as operating expenses rise. When the Fed is in its inflation-fighting mode, too much tightening will cause a recession.
However, there are also positives to increasing interest rates. Rates are merely the price of capital. Higher demand for capital means the economy is strengthening, as consumers borrow to spend on goods and to buy homes and companies seek to hire and do more investment spending. Higher rates also mean the risk of deflation is decreasing. Lastly, it reflects a normalization of Fed interventions, which today would suggest that the credit crisis is behind us.
Tapering Is Now Tightening David R. Kotok July 19, 2014 For a long time, as we saw it, tapering and the threat of tapering (as in last year’s taper tantrum) did not constitute tightening. Today we explore why we believe the situation has now changed. In order to understand why tapering was not…Read More
Central Bank Smackdown By John Mauldin July 5, 2014 BIS: The Opening Riposte Yellen’s Counter-Riposte The Coming Liquidity Crisis A Few Thoughts on the Nonfarm Payroll Number Nantucket, New York City, Maine, San Antonio, and China(?) Smackdown: smack·down, ˈsmakˌdoun/, noun, US informal 1. a bitter contest or confrontation. “the age-old man…Read More
A Limited Central Bank by Charles I. Plosser, President and Chief Executive Officer As the Fed begins its 100th anniversary year, I believe it is entirely appropriate to reflect on its history and its future. At the same time, we need to reflect on what I believe is the Federal Reserve’s essential role and how…Read More
Chair Janet L. Yellen: Monetary Policy and Financial Stability At the 2014 Michel Camdessus Central Banking Lecture, International Monetary Fund, Washington, D.C. July 2, 2014 It is an honor to deliver the inaugural Michel Camdessus Central Banking Lecture. Michel Camdessus served with distinction as governor of the Banque de France and was one of…Read More
For the week ending June 6, the St. Louis Fed Financial Stress Index (STLFSI) rose to -1.256 from -1.289. The latter is currently the lowest level on record for the index, which goes back to December 1993. The recent increase in the index was the first in the past five weeks, and the index has…Read More