Fed rates in late 70's

Discussion in 'Trading' started by pumpanddumper, Jun 12, 2007.

  1. The spike was caused by pretty horrific inflation (and a change in Fed tactics), and of course it could happen again.

    In '79, the Fed changed from focusing on the fed target rate to changing the bank reserve level. This caused a wild spike in interest rates.

    Remember, the fed can do three things:
    1) Change the reserve requirements
    2) Change the discount rate
    3) Buy and sell bonds on the open market

    A most interesting graph is the fed rate vs. inflation.
  2. Isnt this horrific inflation? Two years ago, the price of gas was under 2. One year ago it was in the 2s. Now its in the 3s. Do I hear 4?
  3. piezoe


    Articulate, i may be having a senior moment, but doesn't the Fed also set the margin rate rather than say then SEC?
  4. Thanks, I don't think 6% is out of the question. Maybe next year and rates remain unchanged all year?

    I hope cutting rates is out of everyone's heads....

    I wonder what Bernanke will say on Friday morning...
  5. Yes it is inflation, but you must remember the market focuses on the core rate, which excludes the energy component. When the congress tied entitlement payment increases to the CPI it spelled the end to true CPI data. This is now a politically motivated number , and will always under report the actual result. I believe it was 95 when they voted to change the methodology. The interesting thing is there has never been a component to track tax increases as inflation. An upward revision in the tax rate should also be viewed as inflation.
  6. Yes, indeed. I'm not aware of the relationship between broader interest rates and the margin rate (currently 50%). (I'm sure there is one, but I don't know what it is).

    As to CPI... The GDP deflator may be one of the cleanest estimates of real inflation, and it's not politically manipulatable. M3 is also worth looking at.

    Inflation in the late 70s was in the >15% range. At the time, you could buy a bond at 14%, but would you have wanted to with inflation running at 15%+?
  7. Moreagr


    there is alot of factor effecting oil political BS supply demand and flucuations in interests rate and currencies.

    the main thing that is helping us is we are importing deflation. i.e. chinese goods etc.

    i dont think its that bad of inflation just think about all much electronics and related items have fell in price in the last 25 years or so.

    computer in 1985 $3500

    now 2007 $400

    sleep tight :)
  8. Yeah the deflator is far cleaner than the actual number, good point. However we have been conned into believing the CPI means something. I was pointing out that actual economic numbers are either not available or hidden.
  9. Moreagr


    M3 is not measured since 2006
    #10     Jun 12, 2007