Category Archives: Interest Rates

Why The Landscape Is Different and What It Means For Commodities

The ECB rate cut is significant because it signals to the trade that European Central Bankers and the US Fed are clearly moving in different directions. Rember, since the crash back in 2008, every move the ECB made to lower the value of the euro was trumped by a US Fed move to lower the value of the US dollar.  There is no debating the fact the lower US dollar helped fuel the commodity supper-cycle.  Now all of a sudden the ECB and the Fed are headed in opposite directions and the US dollar is surging higher.  Many analyst believe this environment will make it extremely difficult if not impossible for commodities (as a whole) to attract NEW big money investors! Make certain you understand how the landscape is changing and what this might mean for your business and your investments.

Some Interest Rate History To Think About

Stocks typically perform well in the months leading up to an initial rate increase. For instance, when the Fed first raised interest rates in 1994, 1999 and 2004, the S&P 500 rallied 11%, 21% and 18%, respectively in the 12 months prior to those moves. The market then declined in each of those subsequent one- and three-month periods following a rate increase. Historically, the Fed funds rate is usually between 2-5%. That’s because the Federal Reserve has found that a healthy economy functions best with an inflation target of 2% (for the core inflation rate). However, there were certain times in history where the Fed funds rate was well above that, to curb runaway inflation. Other times, it was well below — to stimulate economic growth.

  • Highest Fed Fund Rate: The Fed Funds Rate reached a high of 20 points in 1979 and 1980. This was to combat double-digit inflation.
  • Lowest Fed Fund Rate: The current Fed Funds rate is its all-time low at ZERO%. The Fed lowered it to this level on December 17, 2008, ​which was ​the 10th rate cut in a little over a year. Prior to this, the lowest Fed Funds Rate was 1 point in 2003, to combat the 2001 recession. At the time, there were fears that the economy was drifting towards deflation.
  • Looking Back On Rate Hikes: Since 1965 the Fed has embarked on tightening their policy 15 times. In a somewhat similar pattern, the tightening that began in February 1977 followed a long easing cycle dating back to September 1974. However, inflation was on the rise again, spurring the Fed to begin hiking rates. Stocks fell throughout 1977 before bottoming out early in the following year.
  • Most Recent History: Since Bernanke raised the rates in 2006…the Fed has taken a major dovish stance. In 2007 they lowered rate​s​ on four separate occasions starting in August. That was followed in 2008 by the Fed lowering rates on seven occasions. Ever since Obama took office in 2009, the rates have remained at rock bottom.