The FED’s Path to Normalcy

For anyone who is a regular reader of this blog, you know that I believe the FED tried to do something that it is incapable of achieving when it implemented QE2 and QE3. It would appear that the FED now finally recognizes this situation with the raise of interest rates in December in spite of lackluster growth and inflation.   The problem has been and will continue until the Political Revolution takes over and grass roots inspired politicians implement Fiscal actions to ignite real growth.

To me this means that the FED should continue to raise Fed Funds rates to at least 1.0 this year.

It would appear that my mentioning 20 percent interest rates in this blog yesterday has generated a bit of discussion. Good, that was the point. Sure we are not going from 0 to 20% but higher rates will help bring some normalcy. I have always believed and expressed the view that a problem caused by excess liquidity will not find a long term cure with more liquidity. At some point the mechanism has to wean away the un-productive aspects.

If one takes a look at the 1970 to 1980 period and the kind of rate increase that stopped the inflationary behavior then and apply it to the current picture.

Feb 1972 low Fed Fund rate          3.30 %

Feb 1972 low Prime Rate               4.50 %

Dec 1980 High Fed Fund Rate     18.90 %   ( approx a 5 times increase )

Dec 1980 High Prime Rate            21.50 %  ( also approx a 5 times increase )

Dec 2015 Fed Fund Rate                 0.34 %

Dec 2015 Prime Rate                       3.50 %

Two points from these numbers:

1) One is that the low Prime rate in 1972 was just 1.36 times the Fed Funds rate.  In 2016 the Prime rate is 10.0 times the Fed Funds rate.  I’m sure the banks would say that the huge difference in 2016 is due to the base operating costs of the banks.  In any case I’m sure that some of the inequality in the current economic arena is due to the fact Big Guys are getting money closer to the FF rate than the Prime rate.  Regular consumers are living in a different world with Prime rates and Credit Card rates which are off the chart comparatively.

2) If one uses the five times factor and work it against the current 0.34 % Fed Fund rates you see that a FF rate of 1.75 % is not out of the world and probably more normal.

As to today’s markets:

The S&P market continues to set the stage with the 1812 to 1990 trading range (swing point of 1901).  The dollar got squashed this past week, as expected, with the dollar bears (probably including the Fed) trying to set the stage for a down move, and actually got close to the 95.50 level we mentioned.  Anyway, I still believe the Dollar will be the big bull move this year.  The bond bull move continues it erratic move upward.  Gold has reached the 1150 upside target, probably not much reason to be long here at this point, and Oil continues to flop around with various calls by smart people that we have seen the bottom.