Submitted by Michael Pento – Pento Portfolio Strategies
One of the current myths promulgated by Wall Street is that the Federal Reserve will raise rates once this year, breathe a sigh of relief, and be done until the “12th of never”. But those who are familiar with our central bank’s history are aware that the Federal Open Market Committee (FOMC) has never tightened the Fed Funds Rate just once. A quarter point hiking cycle has no historical basis and is just wishful Wall Street thinking.
In the spring of 1988 fearing a rise in core inflation, the Fed went on a tightening cycle that lasted from April 1988 to March 1989. During that time the Fed funds rate increased more than 300 basis points. This episode was followed by a recession beginning in 1990, suggesting that the corrective policy actions may have intensified a weakening economy, and that the Fed is prone to being economically tone deaf.
Then, during the fall of 1993, a rise in long rates represented a potential inflation scare and led the FOMC to raise the Funds Rate again another 300 basis points between February 1994 and February 1995.
And finally, as concerns over a potential housing bubble mounted, the Fed began to hike rates in June 2004 and continued through July of 2006, for a total increase of 425 basis points. Soon after, the subprime mortgage crisis was exposed and the Great Recession was in full throttle.
But we don’t have to be Fed soothsayers to predict the planned trajectory of the Funds Rate; the Fed makes its intentions public during four of its eight scheduled meetings. During those meetings the FOMC provides us with a model of the members’ expectations for policy rates in a chart known as the “dot plot.”
While the FOMC is not bound by its “dot plot” predictions, it does provide insight into committee’s monetary policy plans. The markets are aware of their intentions and will begin to price in future interest rates moves as soon as the Fed begins liftoff. Continue reading