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4/23/2004

There have been four periods of Federal Reserve tightening since 1987, with an average change in fed funds of +168 basis points. It's a little late for Passover, but George Zachar asks:

Q. What makes this rate rise environment different from prior rate rise environments?

1. The insanely low nominal starting point for funds.
2. The recent epic swing in fiscal policy, along with its uncertainty going forward (the tax cuts are actually set to expire)
3. China
4. Greenspan formally and publicly declared the banking system to be not at risk from rate rises.
5. The domination of the credit market by option-based paper (mortgages).
6. The parallel expansion of the interest rate swaps market, which both disperses and obscures risk.
7. The likelihood that this is Greenspan's "last hurrah."

George adds: "I'm all for counting, but the rapidly evolving environment within which rate rise regimens occur makes it perilous to be mechanical."