Tuesday, September 16, 2008
Now that most people have come to their senses about rate hikes by the Federal Reserve occurring anytime in the foreseeable future, let's have a look back once again at the last two rate cutting cycles for another reality check.
Now a full twelve months since the first reduction in short-term interest rates last September, we are officially "behind schedule" relative to the last easing cycle that began in 2001.
That's kind of surprising when you think about it.
Ben Bernanke has effectively utilized "shock and awe" monetary policy such as three-quarter point rate cuts to make most market watchers think that he's been more aggressive in slashing interest rates than his predecessor.
But, clearly, one year in, he has not.
One year into the last bubble clean up mission, ol' Alan Greenspan had already eased by almost five percentage points - from 6.5 percent to 1.75 percent - and that's where he rested for almost a full year. Another half point cut, a six month pause, and then another quarter point lopped off more than two years after the first rate cut brought the Fed funds rate down to one percent where it sat for another year.
Except for the retired Fed chairman, the entire world now seems to think that rates were left at one percent for way too long, but most people don't seem to remember that it took almost two-and-a-half years to get there.
Given that we are only a year into the current downturn, one that is likely to be more severe than the last due to its broad nature and no ready cure in sight (i.e., no new financial bubble on the horizon like last time when a fresh housing bubble followed a bursting stock bubble), it makes good sense that current Fed Chairman Ben Bernanke is taking his good 'ol time.