In a time without precedent, benchmarks, or guardrails, we can claim just about anything and opposition will have to acknowledge possibility. But this is serious, and we do have precedent. Tomorrow, the Federal Reserve will meet and decide whether to raise the overnight cost of money, which will have an effect on the economy. Lessons from the '90s In 1997 a major debt and currency crisis began in Thailand with a run on the baht, and quickly became a global affair known as the “Asian Contagion.” The crisis peaked in August 1998 with the default by Russia on its debt. The Fed and Treasury feared the crisis would spin out of control, the rest of the world weakening and only the US able to pull the world out of a bad spiral. The Fed’s cost of money (the Fed funds rate) was 5.5 percent. By the way, the stock market was booming, two years after Greenspan’s “irrational exuberance warning, but the Fed cut its rate three months in a row in fall 1998 to 4.75 percent. In Feb...
- The outside world is a wreck, the U.S. is the world’s only locomotive, and cash is pouring in here again, forcing long-term rates down.
- The Fed’s cost of money is still at an all-time emergency low, and the Fed owns nearly $4 trillion in Treasurys and mortgage-backed securities.
- The Fed is trying to tighten, but mortgage rates here are now down from 4.25 percent closing on 3.5 percent in just six months.