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A brief, modern history of surprise fed announcements.
Many are taking to the airwaves suggesting the Fed raise rates earlier. Enough is enough, they say. The economy is booming and raising rates will help it from overheating.There has been a lot of talk recently about what the Fed should and shouldn’t do with rates. The Fed has stated that it’s “highly unlikely” it will raise rates this year (currently at 0.25%). More specifically, it stated that it will not start raising rates until inflation is expected to exceed 2%.
So, what will the Fed do?
First, it’s important to note that the Fed signaling anything at all to the public is a recent development.
The first ever press conference after an FOMC meeting was by Ben Bernanke in 2008. During the time of Alan Greenspan, starting in 1987, “there were no statements following FOMC meetings, no published minutes, no release of any FOMC materials, and certainly no press conferences. In other words, the FOMC never disclosed changes in policy. People outside the system had to figure things out by other means”*.
Greenspan, Fed chair from 1987-2006, would keep the public unsure of what it would do next. The reasoning is that this preserved flexibility for him and the Fed to better control things. If there was no statement on targets, then those targets could change as needed. The Fed could choose what to do without being handcuffed to previous statements.
This changed with the Great Recession of 2008. Then-Fed Chair Ben Bernanke started giving TV interviews, such as for 60 Minutes. He was the one to hold the Fed Chair’s first press conference after an FOMC meeting.
Janet Yellen continued this by holding press conferences quarterly after FOMC meetings. Jerome Powell decided to hold them monthly.
Recently, Powell has led the Fed in a transparent way with the public. He signals its moves or non-moves ahead of time. Wording on press conferences is chosen carefully so that a few words, such as “transitory”, “powerful”, “mid-cycle adjustment” or “just below”, can signal what the Fed is thinking and might do in the future.
As transparent as it might be, sometimes a surprise or emergency rate change is ordered.
Let’s look back at what’s happened with other Fed announcements, particularly surprise fed announcements.
While surprise and emergency interest rate cuts are unusual, they are certainly not unprecedented. Interest rate hikes are much less likely, historically speaking – there is one detailed below.
The most recent surprise or unscheduled rate cuts were in response to major events. The below focuses on the fed funds rate - not the discount rate – because it is the fed funds rate that impacts non-bank borrowers, such as individuals and businesses.
October 1987 - Black Monday Stock Market Crash of 20% in one day
- The crash occurred on October 19 and on October 30 Greenspan announced an emergency Fed Funds Rate cut of 0.50%, from 7.25% to 6.75%. Rates went down to 6.5% in 1988 but were back up to 9.75% by the end of the year. The crash was short-lived and Fed hiked rates to stave off inflationary pressures.
October 1998 - Russian financial crisis, Asian economic crisis, & collapse of the hedge fund LTCM
- The FOMC made a surprise interest rate cut of 0.25%, from 5.25% to 5.00%. It lowered it again to 4.75% on November 17, 1998, before raising in 1999 and 2000 to a peak of 6.5%.
2001 - Tech Bubble Burst & 9/11
- On January 3, 2001, the Fed announced a surprise interest rate cut by 0.50% to 6%. Six more interest rate cuts followed before the 9/11 attacks, and four after the attacks, for 11 total rate cuts in 2001.
- The FOMC announced an emergency rate cut on September 17, 2001, by 0.50%, from 3.50% to 3.00% to provide liquidity to markets after the terrorist attacks.
2007-2008 - The Financial Crisis
- August 2007 – The subprime mortgage crisis prompts the Fed to keep the fed funds rate at 5.25% while cutting the discount rate by 0.50%.
- January 22, 2008 – Recession risks mount as stocks crash so the FOMC cut rates by 0.75%, from 4.25% to 3.50%.
- January 30, 2008 – The FOMC cut rates another 0.50% to 3.00%.
- 7 more cuts occurred in 2008 to take the fed funds rate to 0.00% to 0.25%.
- October 8, 2008 – Lehman fails and the last surprise interest rate cut for 2008 decreases from 2.00% to 1.50%, before the zero-rate policy was set in December 2008.
- Rates would not be hiked until December 2015.
March 2020 - The Pandemic
- On March 3, the Fed made an emergency rate cut of 0.50%, from 1.75% to 1.25%, to combat the risk of Covid-19 (known as coronavirus at the time) on the US economy.
- This was the first emergency rate cut since the 2008 financial crisis and came 15 days before its scheduled meeting and any announcement was expected to be made.
- The Fed cut rates further on March 15th by 1.00%, from 1.25% to 0.25%, where it remains today.
What about surprise rate hikes?
In April of 1994, there was an emergency rate hike from 3.50% to 3.75%. This occurred after rates were already being hiked throughout that year by 0.25% each time. Then, after the emergency hike, the Fed opted for a 0.50% increase, another 0.50% increase, and then a 0.75% increase to 5.5%. The fed funds went up to 6.00% by February 1995 and then was cut by 0.25% six months later.
Why was the rate hiked? The Fed changed its gradual 0.25% approach to a much more aggressive approach because it was worried about the then-strong economy and a moderate uptick in inflation. Sound familiar?
How did the market respond? The Dow Jones rose 2.1% for the year. The two-year US Treasury Note went from 5.8% in May 1994 to 7.7% by year end.
So, again, what will the Fed do? As they say, history doesn’t repeat, but it does rhyme. For now, I’d stick with what the Fed has been saying: that it will not start raising rates until inflation is expected to exceed 2%. And when it does, be ready for some short-term volatility in the stock market. It’s a feature, not a bug, of the market.
What “major event” could cause a surprise announcement? The easiest thing that comes to my mind is inflation or hyperinflation… and, of course, a black swan event that we do not yet know about.
“Since becoming a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.” Federal Reserve Board Chairman Alan Greenspan, September 22, 1987 (The Wall Street Journal, as cited in Geraats).
“More recently, in the 1980s, policymakers, myself included, were concerned that being too explicit about short-run targets would make such targets more difficult to change, impeding necessary adjustments to evolving market and economic conditions.” Federal Reserve Board Chairman Alan Greenspan, October 11, 2001.
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