The Fed Already Tightened 3.25% And Probably Doesn't Know It
- As seen in the Shadow Federal Funds Rate, the effective interest rate was as low as -3% in April of 2014 before the Fed started tightening.
- The current rate of 0.25% means the Fed has already tightened by 3.25%.
- There is no way the Fed will stick to its proposed rate hike schedule. If it does, we should expect crippling deflation, a market crash, and a resulting depression.
"Don't Fight The Fed" is a Wall St. adage as old as the Central Bank itself. The reason for its staying power is that it's absolutely true. Interest rates set by the Fed are one of the single most important factors affecting stocks and the wider economy.
The Fed Funds Rate affects the interest you pay on a car loan, the demand for housing, the hurdle rate for a company to make capital expenditures, the discount rate used to value companies and their stock, and much more.
This is why there's always so much hoopla over what the Fed is going to do…. they have the biggest lever to turn the business cycle.
When the Fed announced they were hiking rates in December, a lot of talking heads came out saying investors shouldn't be worried. They said that historically, equities don't negatively react until at least the third rate hike or so.
In this, they are right. There is a certain lag time between when rates are first raised to when equities start selling off due to tightening monetary conditions.
But what these commentators fail to grasp is the loosening/tightening effects of quantitative easing (QE). With the Fed Funds Rate already at the zero bound, the Fed was forced to buy treasuries through QE to push the yield curve lower, effectively loosening monetary policy even more. (Keep reading....)
