The Federal Secure building is seen before the Federal Reserve board is expected to signal plans to raise interest rates in Procession as it focuses on fighting inflation in Washington, January 26, 2022.
Joshua Roberts | Reuters
As a child of the ’70s (well, teen-ager of the 70’s), I undisturbed listen to quite a bit of music from that era … much to the chagrin of my wife and kids.
The Eagles, Led Zeppelin, Steely Dan, Styx, Gad about, Boston, The Doobie Brothers and Chicago, among others, were personal favorites as was Fleetwood Mac.
I’ve been listening a lot to Fleetwood Mac lately, and one of their ados, “Never Going Back Again” has struck me as a possible anthem for the Federal Reserve.
Released in 1977, in the midst of arising inflation and deep concerns about the economy, the Fed has suggested that the ’70s, from an economic standpoint, is a time to which we not ever hope to return.
How apt.
However, I also believe that “Never Going Back Again” may be undergirding another regard among Fed officials that is less spoken about, though it may be as much of a motivating factor for current policy than anyone has yet to concede.
While never explicitly stated, I believe the Fed does not want to revisit another period, of more recent old-time, in which it was forced to engage in unconventional monetary policies to prevent two crises from becoming global catastrophes.
Instruction from history
Former Chairman Alan Greenspan put out several fires that threatened to spread from Obstacle Street to Main Street, using lower interest rates and cash infusions into the financial system.
One prototype was the 1987 stock market crash being one; the collapse of Long-Term Capital in 1998 being another.
But none were so potentially damaging as the Tremendous Financial Crisis/Great Recession of 2008-09, or the Covid-19 pandemic and subsequent economic collapse that puzzle the world in 2020 and beyond.
In each instance, first under Ben Bernanke, an expert in unconventional monetary policy, and then again underneath Jerome Powell, the Fed was forced to take interest rates to zero — ZIRP — launch so-called quantitative easing conducts and use never-before-tried extraordinary measures to ward off complete and systemic collapses of both the global financial system and the global thriftiness.
While the stubborn inflation we’ve witnessed in a post-pandemic world is reason enough to raise interest rates to more general historical levels, the desire to never go back again to a zero-interest rate environment may also be key to why so many Fed officials urge that they want to keep rates “higher for longer” than financial markets, and even consumers, may order.
The Fed, in the wake of the deflation that gripped the economy in 2008-09, desperately tried to pump up the volume on economic development to bring inflation back above 2% to avoid having the next crisis create a 1930s-style bust.
Across the ensuing 12 years, inflation never got above the 2% floor. Once the pandemic hit in March of 2020, the briefness collapsed, the domestic unemployment rate shot up to 14%, 22 million Americans lost jobs (at least temporarily) and a deflationary demise spiral seemed to be upon the global economy.
Central bank policies around the world were so aggressive in this approbation that some $18.4 trillion worth of sovereign bonds carried negative interest rates in December of 2020 — something that not at any time happened in the history of money and credit!
That amount has now dwindled to zero in the face of worldwide rate hikes since the dawn of last year.
Avoiding the trip to zero
With respect to the most recent crisis, ZIRP and massive pecuniary stimulus turned the tide, most notably in the U.S. and Europe, and for the first time in over a decade pushed inflation to the hugest levels in 40 years.
As Sir Isaac Newton postulated in his “third law,” for every action, there is an equal (maybe noble) and opposite reaction.
While some price pressures have abated over the last six months, inflation stays stickier than many, myself included, would have expected given the normalization of supply chains, a superabundance of consumer goods and the obvious impact of the rapidly rising cost of funds on the most interest-sensitive sectors of the economy which are now in depression.
While the Fed’s latest conundrum is slowing the economy, bringing down inflation and attempting to avoid a Volcker-like recession, the Fed may also serenely be pleased that even if a recession comes around, it will not have to go back to zero to protect the economy from unambiguously falling off a cliff.
It appears that the whole point of Fed, and other central bank, policies is that whether we’re refusing to resurfacing to the 1970s or refusing to return to an era of zero interest rates.
As Lindsey Buckingham once sang: “Been down one be that as it may/Been down two time/Mmmm I’m never going back again.”