Truck and Barter: Same Old Playbook

June 30, 2005

Same Old Playbook

By Bob

To say that equity markets were disappointed with the Fed today is an understatement. You can include me the camp that was looking for some sort of softer approach towards interest rates. I had been saying since nearly the beginning of the year that I don't think the Fed would push the Fed Funds rate much above 3.5%. This had been based on the rather anemic money supply growth rates. It was partially based on hope that "this time its different" but, in reality, this looks a lot like a decade ago. The Fed seems to be using the old playbook.

What we're seeing now looks similar with housing replacing the equity markets experiencing some sort of seemingly irrationality. There are some signs of inflation perculating up with oil near 60 just like we saw prices for intermediate goods back in 1994 up sharply. The Fed back then, of course, raised interest rates to counter this trend, but deeds speak louder than words. M3 is grew rather anemicly while M1 was grwoing modestly. 1995 saw these money supply numbers switch with M3 grwoing nicely while M1 wasn't and didn't from June of 1995 till Feb 1998. The Fed was removing liquidity from the system. You can see that the pattern is seemingly repeating itself today with M1 marginally growing. The Fed seems to be repeating the pattern of adding liquidity to the system only to remove it when the economy picked up.

My thought that we were nearer to the end of the rate hike cycle was premised on the fact we seem to be further along in the playbook. M1 right now is hardly growing while M3 is increasing at a pace just below 5%. These numbers are remarkedly similar to those of a decade ago. The market is weary of an inverted yield curve. As you shouldn't try and out think markets, this is justified. With few developed countries growing right now, it seems irrational to kill off the one that is.

Posted at June 30, 2005 04:15 PM

Comments