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Wall Street History
https://www.gofundme.com/s3h2w8
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05/06/2005
The Federal Reserve and the Markets
I thought we’d take a look back at the markets since June 30 of
last year when the Federal Reserve began to raise the short-term
federal funds rate from its historic bottom of 1.00%; eight
increases of 25 basis points (bps), total, to take it up to 3.00%.
The dates listed are for the actual Fed moves which occurred on
a Tuesday or Wednesday depending on whether the Federal
Reserve’s Open Market Committee was a one- or two-day affair.
Using this as the guide then, I am showing the ‘end of week’
figures following the moves (to eliminate knee-jerk reaction
data) for the 10-year Treasury and the S&P 500. [I also threw in
the price of oil just for the heck of it.]
Of course what you see is the “conundrum” that Fed Chairman
Alan Greenspan has spoken of in recent congressional testimony;
that being while the Fed has hiked short rates up a full 2%, the
key 10-year has actually fallen. Continued low rates at the 10-
year level offer major support for the real estate sector which
Greenspan on occasion has mused could be approaching bubble
territory in some parts of the country. [I just think it’s a flat-out
bubble.]
No doubt the Federal Reserve would like to simply prick the
bubble and see real estate cool in an orderly fashion. It was
hoping to do this through a gradual rise in the 10-year, more or
less commensurate with the rise in the funds rate; certainly at
least closer to the 5-5.50% range than the current 4-4.50% one
thus the conundrum.
5/3/05 25 bps to 3.00%....4.26%....1171 .50.96
3/22/05 ..25 bps to 2.75%....4.59% 1171 .54.84
2/2/05 25 bps to 2.50%....4.08%....1203 .46.48
12/14/04 25 bps to 2.25%....4.20%....1194 .46.28
11/10/04 25 bps to 2.00%....4.19%....1184 .47.32
9/21/04 ..25 bps to 1.75%....4.03%....1110 .48.88
8/10/04 ..25 bps to 1.50%....4.22%....1064 .46.03
6/30/04 ..25 bps to 1.25%....4.46%....1125 .38.39
Using my “Week in Review” archives (the source for the above
market data as well), following is a piece of my commentary
from 7/3/04 after the Fed’s initial rate increase.
“ in raising rates the expected 25 basis points the Fed
averred:
“ ‘Monetary policy remains accommodative underlying
inflation still expected to be relatively low (but) policy
accommodation can be removed at a pace that is likely to be
measured.’
“So you’d think from this the Fed won’t be overly aggressive in
the coming months unless the inflation data goes berserk to the
upside, and at least for this week you’d be hard pressed to find
evidence of prices running wild. Certainly the bond market
didn’t think so .
“One thing is for sure, the Fed’s accommodative policy of the
past few years has been all about propping up real estate, thus
encouraging homeowners to use their chief asset as a piggybank
for increased consumer spending.”
Of course if the above from over ten months ago sounds familiar
it’s because little regarding this debate has changed since then.
Wall Street History will return May 13.
Brian Trumbore
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