INSIDE THE FEDERAL RESERVE 109■ Just How Nasty a Rate increase Can Be
It’s unfortunate that we have to be spending so much time on
the Federal Reserve. It’s the place to start if you want to under-
stand a lot of what’s going on in the markets. In fact, nothing
is more important — but I wish that weren’t true.
I wish the central banks could go back to just being boring,
opaque, marginal institutions that took care of money supply
and acted as a lender of last resort instead of monstrosities
that seem to manipulate and invade every corner of every mar-
ket in the world. But unfortunately, that is what we have today.
When the Fed manipulates the dollar and dollar interest
rates, they are directly and indirectly affecting every market
in the world — equities, gold, real estate, other commodi-
ties, junk bonds, corporate debt, etc. So even though I wish it
wasn’t the case, understanding what the Fed will do next is the
big question.
Let’s take two scenarios: What if they raise rates? And what
if they don’t?
I’ll address both of those directly but first, I’d like to give
you some background to help you understand what’s behind
the debate. The Fed has certainly signaled that they intend to
raise rates and it’s what the markets expect.
Securities around the world are priced as if the Fed were
going to raise rates. I’ve never seen anything more trumpeted
and more advertised in my career. There’s good reason for
that. The last time the Fed raised rates was 2006.
In terms of cutting rates, they hit bottom in late 2008 when
they got to zero — and they’ve been at zero ever since. It’s
been six and a half years at zero. But you have to go back two
years before that to find the last time they raised rates, so it’s
going on nine years at this point. That’s a long time without
a rate increase and people may forget how nasty they can be.
I was in the markets in 1994 when the Fed raised rates,
and it was a wipe out. That’s when we had the bankruptcy of