Gold News

Fed Rates: This is Now Normal

Or close to it, says the self-declared 'abnormal' US Fed...
 
SO the U.S. FED is going to start "normalization" of its balancesheet, writes Adrian Ash at BullionVault.
 
When?
 
"Soon," says the Fed.
 
How soon?
 
"Relatively soon."
 
Ah, right. Which is when?
 
"Provided that the economy evolves broadly as anticipated."
 
Okay. Let's pick this apart, and see what the Fed is trying to tell us.
 
First, the word "normal". It keeps cropping up in Fed statements, like the policy committee just want to fit in and stop getting gawped at by passers-by. Only, not yet.
 
Chart of US Federal Reserve assets. Source: St.Louis Fed
 
If you need reminding, normal doesn't look like this.
 
The Fed's own statement pretty much called this 'abnormal' on Wednesday. Again.
"[The Fed's top committee] anticipates...keeping [its] holdings of longer-term securities at sizable levels...until normalization of the level of the federal funds rate is well under way."
That's what it said back in May, repeating the line used after every meeting since the Fed first yanked its key interest rate off the floor of zero in December 2015.
 
Come June 2017, however, the Fed changed that wording...after 18 months and 4 baby-steps hikes of 0.25 percentage points in its key interest rate.
"The Committee currently expects to begin implementing a balance sheet normalization program this year."
Now in July, it's going to get to work reducing its QE bond holdings "relatively soon".
 
Maybe that still means "this year". Maybe not. But the change of wording over the last 3 months clearly says that interest rates – if not quite "normal" just yet – are "well on the way".
 
Maybe they are. But on their way to where? What kind of normal should US savers, investors, business people, creditors and Dollar-users (everyone, everywhere) really expect?
 
Effective Fed Funds rate. Source: St.Louis Fed
 
Over the last 6 decades, for instance, the Fed Funds rate has shown a mean average of 5.03%. The median (meaning half higher, half lower) was 4.83%. Whereas the mode – meaning the single most common reading – was 0.09%, thanks of course to the zero-rate policy of 2009-2015.
 
More telling perhaps, and lagging inflation by 0.6 percentage points, today's "normal" rate (or "well on its way") lags the typical rate of the last 6 decades by a good stretch, too.
 
Real Fed Fund rates have averaged 1.30% mean since July 1957...1.6% median...and 1.4% mode.
 
Adjusted for CPI inflation, Fed rates have only been lower in 167 months across the last 720. So this new normal (or something very much on its way to it) is significantly lower than post-WWII history wouldn't point and laugh at.
 
First to get the memo as ever, any wonder Wall Street is behaving accordingly? Or that the Dollar has been sinking? Or that gold prices are finding traction again as the Fed's new normal message gets through?
 
And any doubt that cash in the bank...now confirmed as "zero risk" by the 2008 bail-outs...must continue to mean "zero return"?

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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