Saturday, June 21, 2014

Fed Funds and Instability

If you leave
Don't look back
I'll be running the other way

Many things to ponder when viewing this chart.

Fed funds rate has declined from ~18% in 1980 to effectively zero today. A secular decline. The distortions wrought by this policy over the past 30 yrs are mind boggling.

GDP growth has slowed with Fed funds rate decline. This is no spurious correlation.

Not shown here, but lay stock, bond, real estate prices on top of this graph and see what you get. Again, the correlation is not spurious.

The Fed intervenes with easy credit at every 'crisis' point. Can there be more fertile ground for moral hazard?

The secular decline in Fed funds rate indicates that the Fed never fully takes the punch bowl away. Residual stimulus is left in the system after each 'crisis.' There is no 'neutral' funds rate. This is a recipe for addiction.

With Fed funds rate at zero, the Fed has reached the notorious 'zero bound.' Does that mean that they are out of gas? Hardly. There are negative fed funds rates. There is outright asset purchase (a.k.a. 'quantitative easing'). There is straight money printing (e.g., sending people 'stimulus checks').

The tilt to the graph suggests diminishing returns to each unit of Fed intervention. It also suggests that natural market forces are building. At some point that potential energy will turn kinetic--and the Fed will have less counterforce to cope.

Declining Fed funds is a reflection of growing instability.


dgeorge12358 said...
This comment has been removed by the author.
dgeorge12358 said...

The tenth amendment said the federal government is supposed to only have powers that were explicitly given in the Constitution. I think the federal government's gone way beyond that. The Constitution never said that you could have a Federal Reserve that would have $2.8 trillion in assets. We've gotten out of control.
~David Malpass

Note: Value of Assets on Federal Reserve Balance Sheet are $4,408,457,000,000 as of 6/18/2014