Thursday, October 26, 2006

A Brief History of Pauses by the Fed

With the Fed's action yesterday, the Fed funds rate will remain at its current 5.25% at least until December (barring something really dramatic and unforseen) - which means that the pause in changes in the Federal Funds rate will be at least 163 days long.

For comparison, there have only been three previous instances in the past 25 years when interest rates were held steady for at least 100 days following an interest rate hike:
  • 1989: rate hike, then a 101-day pause(with the exception of a tiny 19-day blip in rates at the end of that period), then rate cut;
  • 1995: rate hike, then a 154-day pause, then rate cut;
  • 2000: rate hike, then a 231-day pause, then rate cut;
  • 2006: rate hike, then at least a 163-day pause, then... ?.
And that is all.

The Fed's statement yesterday seemed relatively bullish, in the sense that it warned that the Fed might need to raise rates in the future, but said nothing about the possibility of needing to cut rates in the future. However, history certainly seems to be on the side of those who suspect the next move (when it comes) will be a rate cut, not another rate increase.

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