Too much, too late?
Economics January 30th, 2008Barely a week after last week’s extraordinary 75 basis point cut, the FOMC will meet again today to discuss whether or not to cut the Fed Funds rate.
Since the credit markets tanked in August of last year, we’ve had a 50 basis point cut in September, followed by 25 in October and another 25 in December at regularly scheduled FOMC meetings. Factor in the surprise 75 basis point inter-meeting cut, and that gets us to 175 bps of easing in less than five months.
Sounds familiar?
This pattern of drastic easing is very reminiscent of 2001 when the Fed, again reacting to extreme circumstances, drastically reduced interest rates in swift 50-basis steps (including an inter-meeting rate cut immediately folliwng the terrorist attacks of 9/11) to a floor of 1.00%. In total, the Fed Funds rate fell by 475 basis points, from a high of 6% in January 2001 to 1.25% in November 2002 - by which time our mid, short 2-quarter recession was long over - and then even lower to 1.00% in June 2003.
(FYI: a full history, 1971 to present, is compiled by the New York Fed and is available here).
Sure, hindsight’s always 20/20, but to me, that always seemed like a *bit* of an over-reaction, and as hindsight is quick to suggest, keeping such a low floor on interest rates for such a long time - they didn’t raise from 1.00% until their June 2004 meeting - certainly helped fuel the onslaught of cheap credit and mispricing of risk for which we are paying the price today.
So if 2001 was any lesson, I hope the Fed doesn’t over-do the rate cuts this time as well. From the looks of it, the market is predicting another 50 basis cut today, with at least 25 considered a sure thing. I think we’ll get at least that much. And with the yield on the two-year tresuries in the 2-2.25% range, the market seems to assume another 75 bps of easing ahead. So like it or not, 2008 will likely be a year of easing monetary policy. I just hope that it doesn’t prove to be - like in 2001 - too much, too late.
