The chairman of the Federal Reserve, Jerome Powell, spoke last week at New York’s Economic Club. This speech was very highly anticipated, as regularly scheduled Fed meetings happen just once every six weeks, making this a rare opportunity to gather insight into interest rate policy.
Interest rate policy was, in fact, the major point of discussion, although the chairman covered a variety of other topics as well. Any news about the interest rate policy is important to pay attention to, as that is the Fed’s major tool to affect national money supply and inflation.
Jerome Powell said the rates were “approaching the neutral rate” during his speech, which is interesting because recent Fed talks have indicated in fact that rates will continue to increase in the future. This wording, however, seems to now indicate that the rate-hike cycle may be slowing down, or even coming to a stop, and should the economic growth slow, there would be a possibility of even cutting them.
A Look at Past Fed-Controlled Interest Rates
By taking a look at the graph below, you can see the federal fund rates between 1955 and today. The dashed pink line shows the current rate of 2.25% against the previous rate cycles.
What we can gather from this graph is that for the majority of the past 60 years, the rate spent much more time higher than 2.25% than it did below that percentage. Knowing this, it seems difficult to believe that the current rates are “approaching neutral”, as Powell said they were. Even considering that rates do vary widely over the course of a number of years, a more accurate mean would place it at about five to six percent.
Also, keep in mind that should the Fed stop raising rates now, the 2018 target would be the lowest ever point for the Fed to end an increasing cycle. The most recent peak, that of 2007’s, was 5.35%. Before that was the 1990’s peak of 6.50%, and the late 1980’s of 10.00%.
Why then would the Fed consider ending the rate hike cycle when it is currently at its lowest ever point? To get an idea of this, we can take a look at today’s economic climate.
Debt to GDP a Cause
One answer might be the level of the national debt, which is at the highest point ever outside of the late 1940s as a percentage of gross domestic product (GDP).
Through another look at the earlier chart, we can see that the last time the Fed held the interest rates at or below the current level of 2.25% was in the early 1950’s.
Knowing this, you may think that there is a precedent for the level of national debt we have today. However, there is one massive difference between the last time we had such a high level of debt and our current climate. At the end of the 1940’s, the US was only a few years outside of World War II, answering for a big piece of such a large economic burden.
What has made our national debt approach a level that was experienced in the time following the deadliest conflict in global history? The debt accumulated in the 40’s allowed America to establish itself as a world superpower through its defeat of the Axis powers. What does the current level of debt have to show for its shockingly high level?
The bank bailouts that followed 2008’s financial crisis, as well as the perpetual wars in the Middle East, could be argued to be causes of this high level of debt to GDP. These debt loads tying us to the time after World War II distinguish themselves by coming from much more dubious causes.
An End Result of Inflation
We know from history that when an empire pushes itself to manage unending conflicts overseas or on internal spending products, the end result usually is a devaluing of currency through inflation. We saw this towards the end of the Roman Empire when their coins in circulation began to sport a lower amount of precious metals content:
(source: Wikipedia: https://en.wikipedia.org/wiki/Roman_currency)
The Takeaway
We seem to be looking at a future of inflation based on these factors. Although the Fed tells us that interest rates are on their way to an acceptable level, they are in fact at the lowest level in the history of the Fed. On top of this, the debt to GDP percentage has reached its highest ever peak outside of the years following World War II. We know that inflation follows signs like these, and history also tells us that precious metals offer a level of protection against inflation.
