See What Happens When the Fed's Rate Hikes Stop

Welcome to Chart of the Day. I'm Robert Folsom.

See What Happens When the Fed's Rate Hikes Stop

Let's talk about the Federal Funds Effective Rate. Right up front I need to say that here the word "effective" means the real, actual rate for overnight lending between banks. Which does happen to the tune of trillions of dollars on a given day.

The fed funds rate itself is the target rate the Fed suggests to banks, but it cannot force them to follow -- so the fed funds effective rate is a weighted average of rates across all transactions of this type.

So: why does this rate matter enough to go into all that? Glad you asked -- this graph covers nearly 70 years of the fed funds effective rate, and it does about as good a job as you could ask from one chart, to show what happens when the Federal Reserve ends its cycle of interest rate hikes.

Note the gray bands -- these are periods of recession in the U.S. economy, specifically two or more quarters of negative GDP growth.

At a glance you can see that in nearly every case, the cycle for the Fed Funds effective rate was rising, then the rising cycle ended, then recessions followed.

Mind you, these gray bands do show exactly when this happened along the timeline, and, what these recessionary periods also included an epic list of panics, crises and bankruptcies. The 1970 Penn Central bankruptcy was at the time the largest corporate bankruptcy in history. And, the 1976 Franklin National Bank collapse was at the time the largest bank failure.

The early-to-mid 1980s included the end of a rising interest rate cycle, and in turn the Latin American Debt Crisis followed. Later in that decade a rising cycle concluded, the S&L crisis followed, then in the early '90s came another recession.

Then as the 1990s saw another more modest rising effective rate cycle, the long-term capital management crisis erupted -- and when that cycle was complete came the dot-com bust. The rate cycle turned and the deep recession of the early 2000s followed.

As we see in the more recent past, the up cycle resumed and ended, followed by the global financial crisis and, the deepest U.S. recession of the entire post-War period.

What followed for years was an effective rate near zero. Then came a brief rising rates cycle, that ended and then the covid panic followed ... which brings us to this most recent up cycle in the effective rate.

This chart comes from economist Murray Gunn's recent daily commentary, via our Interest Rate Pro Service. His blunt commentary said,

"Brace for breakages. It's becoming more likely that the Federal Reserve is close to the end of its current interest rate hiking cycle. If so, we should be on guard for potential events..."

Bonds and interest rates could become volatile indeed in the weeks and months ahead -- yet market volatility is where Elliott wave patterns are the most clear. The daily and intraday forecasts in the Interest Rate Pro Service can keep you a step ahead of the risks and the opportunities.

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