The Positive Interest Rate Cycle, RIP…1950 – 2019
I’m going to make the case that the US is concluding the final positive interest rate cycle and that upon the next downturn, the Japanese / EU style ZIRP and/or NIRP will become the new norm. But, before we say goodbye…let’s take a look at the ups, downs, and rationale of the post WWII cycles.
Below, the 11 interest rate cycles since 1954, with each subsequent cycle highlighted in a separate box. Each cycle was unique but, in sum, they were part of an arc that has run its course. I’ll detail that the Federal Funds curve actually represents the real annual change in demand. Organic demand accelerated up to 1981 and organic demand decelerated from ’81 to present but synthetic credit / debt based demand was increasingly substituted. And, for some strange reason, when the annual core population growth among the consumer nations was at its peak, the Fed (and CB’s) restricted the economy and potential capacity via extremely high rates. Now at minimal to negative core population change (little to no demand growth), the Fed is attempting to incentivize debt and increase capacity with zero and/or with negative rates?
Below, every US interest rate cycle since WWII, showing cycles from initial rate cut until the initiation of cuts starting a new cycle. Clearly, the ’89 to ’00 and current “lower for longer” cycles stick out like a sore thumb.
Splitting the cycles into two separate buckets; first looking at the cycles from 1950 through 1980. During this period, every cycle finished at a higher rate than the cycle began (recouping all cuts plus some). Cycles were as short as a year all the way up to six years long.
Second, looking at 1980 through 2019; interest rate cuts become deeper, none of the cuts are fully clawed back and rates are progressively lower prior to the next cycle.
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