Federal Reserve IR Policy – Longer, Lower, and ZIRP Until Something (or Everything) Breaks
The current interest rate cycle began in August of 2019 when the Fed cut rates from the previous cycle high of 2.4% to 2.1%. The Fed was then fighting the “repo-crisis” in which the Fed was incapable of setting interest rates…and gasp…free-market based interest rates were the result. And, shocker, they were not “lower for longer”. So, just thought I’d offer put interest rate cycles in perspective and detail why I anticipate this will be the longest and lowest interest rate cycle with likely zero recovery of those rate cuts.
To begin, the chart below shows interest rate cycles from 1981 through 2020 (and likely through 2040)…and note they grow progressively longer, starting and ending lower, and with less interest rate recovery. Based on this pattern and the macro’s driving this, this current cycle is likely to be decades at zero (or more likely moving to NIRP) with no rate hikes.
To gauge the changing dynamics of the interest rate cycles, the chart below details the DEPTH of the cut (the percentage from starting rate to cycle low rate), the DURATION (the number of months from initial rate cut to initial rate cut of the next cycle), and the RECOVERY (how much rates are hiked in the hiking phase from the cycle low rate). Again, the depth of cuts moves progressively greater (essentially 100% for last two cycles), duration stretching from less than a year to over a decade, and recovery moving from outright rate hikes to less than 50% recovery of previous cuts. Again, this the current cycle, we already have 100% cuts and I anticipate something on the order of twenty years of zero rates meaning zero recovery.
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