Back in 2000-2003, we had a very hawkish Fed concerned about asset bubbles (1996 was Greenspan’s ‘Rational Exuberance’ speech), a flooded system with liquidity due to the Y2K scare (turned out to be nothing and that liquidity was removed quickly), sky high stock prices, potential inflation and an economy full of excesses. The Fed was raising rates to fight off inflationary trends (recall we were at 6.5% Fed Funds before the recession hit) that could have permeated and caused a vicious inflation cycle.
Growth was strong and may have been caused by inflation. What we were left with was a prolonged recession and bear market that lasted the usual course of 18 months. We were at/near full employment, many had jobs (but the pink slips started to be delivered). Fed policy was reactionary and rather normal by those standards.
Ben Bernanke was on the FOMC and was very concerned about inflationary trends and was very outspoken about it. However, in an ironic twist it was in 2002 that Bernanke first mentioned the flood of liquidity needed in the event of a deflationary spiral. This was part of a speech given on famed economist Milton Friedman’s 90th birthday and referenced Friedman’s ‘helicopter drop of bags of money into the economy.’ So while Bernanke gets credit for doing it, Friedman gets credit for being the first one to mention it.
Today we have a Fed fighting deflationary forces, a major financial crisis of five years ago that is permanently embedded in memory, a structurally broken jobs market, and super accomodative Fed policy, with bond buying and zero interest rates. Growth is low, steady and without inflation.
WATCH THE FED
The point here is this — while the charts tell us great information we must know where Fed Policy is because that is the one trigger which will move money into/out of markets.
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