If the Fed hikes rates for the 3rd time since Dec-15, growth will come off and pop by 50!

Today on February 15th, in 1710, King Louis XV was born in the Palace of Versailles. In 1945, the Allied forces conducted their last day of an aerial bombing campaign on Dresden, Germany, destroying  over 1,600 acres (6.5 square kilometers) of the city center. And in 2005, ex-Lebanese Prime Minister and self-made billionaire Rafic Hariri was assassinated with explosives.

If we take a look back at previous cycles of Federal Reserve interest rate announcements, we can definitely see a pattern of three-too-many, as far as rate hikes in new cycles are concerned!

Analyze this. Three rate hike announcements in a new cycle, and the economy cannot recover to its extent levels of GDP growth in the contemporary cycle, and the next quarter GDP growth rates drops by half, or by 50%!

Source: Bloomberg

Source: Bloomberg

(1) In the era of the pre-1990s, an increase in Federal Funds Target (FFT) rate from 6.5% to 7.25% in three stages left the U.S. economy reeling: Q-Q SAAR (Seasonally Adjusted Annualized Rate) GDP growth never recovered from a contemporary high of 6.8% in Q4-1987 until the 7.20% growth in Q2-1996, going through the 1990 recession and two hike-cut cycles of the FFT (Next quarter growth rate: 2.3%).

(2) Between January and September of 1994, three rate hikes from 3.0% to 4.75% meant that Q-Q SAAR GDP growth rate of 5.6% in Q2-1994 slowed to 1.4% in Q1 and Q2-1995 (Next quarter growth rate: 2.4%).

(3) Three instances of rate hikes from May to December in ’04, from 1.0% to 2.25% left the GDP’s existential Q-Q SAAR growth rate in the range of 4.3-4.9% of Q1-2005 to Q1-2006 (Next quarter growth rate: 2.1%/1.2%) spiraling down towards the great recession of 2008, only to recover to this level in Q4 of 2011!

The interest rate is often criticized as a blunt tool. But what else can the regulators do? The Fed is helpless, right? Well, if they are truly apolitical, they’d have an argument. And that’s where I lose them, because the Fed is extremely political.

As a recent case in point, Chair Janet Yellen admitted in her press conference post the Dec-16 rate hike, that

“Some of the participants… did incorporate some assumption of a change in fiscal policy into their projections.”

In a statement prior to the elections, she had explicitly stated that committee members will take into account only what is reality, leaving politics aside. She also sounded disingenuous about Trump’s fiscal stimulus plan being “unproductive” and unnecessary, the economy being at full employment, given that she acknowledged the adverse demographic participation and rise in debt, and the Trump fiscal plan isn’t clear yet.

Last week, talk show host Alex Jones revealed that behind the scenes, the Trump administration is actively trying to lobby the Fed to not raise rates. Given her rather hawkish Congressional testimony on Tuesday (“Every meeting is live,” shrink the Fed balance sheet in an “orderly and predictable way,” waiting too long to tighten “Unwise”), it seems that she may not have been fully convinced.

Thanks to Ben Garrison, this is a perfect description of things. The dangers are undeniable!

Source: Ben Garrison

Source: Ben Garrison

All these developments have an upshot. Under the Trump administration, the Fed will very likely lose its so-called independence and be turned into a bureaucracy. The bullish bear would like to see a Salerno-style advance (budget restraint – see link below), but instead we will get an adverse audit of the Fed, the power to regulate money & banking returned to the U.S. Congress (or a branch thereof), and a collectivist, socialist, technocratic approach to money management (Taylor rule/ NGDP targeting??!) versus the current secretive, derisory approach.

Recommended reading:

Federal Reserve bankers mocked unemployed Americans behind closed doors >> The Intercept (Jan, 2017)
“It was a surprise to us” – Yellen reveals how Trump’s fiscal stimulus may have doomed the stock rally >> Zero Hedge (Dec, 2016)
How to rein in the Fed, right away >> Joseph T. Salerno, Tom Woods (Apr, 2015)


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