Until Something Breaks…
The Federal Reserve raised Fed Funds Rates another quarter of a point last week to a full 5%
We’re including the chart this week because we believe the chart gives us some perspective on where we’ve been, where we are, and perhaps even what’s “normal”. Believe it or not, 5% is pretty normal!!!! But it doesn't feel that way today because we’ve been so low for so long.
Some will argue that the investment community and the government officials have all gone soft. Others will argue that Modern Monetary Theory has in some way been implemented and that it was necessary for the Fed to keep rates low to prevent major catastrophes and maximize the potential of our economy. No matter one’s position on MMT, the Fed has 3 charges: Maximize employment, manage inflation, and moderate long-term interest rates, and this current Fed reminds us all the time that they are “data dependent”.
Let’s talk about some of that data. Employment is very high, so we can check one box. Managing inflation has been the biggest challenge recently, but they continue to use the tools at their disposal (Fed Funds and managing their balance sheet) to try and combat that. As for moderating long-term interest rates, that is really more the responsibility of the market. So what now? With the banking system jitters that follow SVB and Signature’s collapse, there were many questions early in the week as to whether or not the Fed had to continue. But when you’re data dependent, it’s often difficult to put the data aside in favor of logic.
The data said employment is hot and inflation is 3x the rate of the Fed’s stated 2% target. So the Fed HAD to keep raising rates. Chairman Powell even suggested that “the job isn’t done”. But as we look at the chart above, we are reminded that the Fed was not always so rigid, and ahead of every major inflection, something broke. In this case maybe SVB was it, but the Federal Reserve has made banking very difficult by raising rates at an unprecedented pace and whether the data next month captures this or not, it does feel like it’s time to take a pause to evaluate whether or not the longer end of the curve may finally catch up with the short end.
