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Fed Rate Cut History – as Predictable as Spam in Your Inbox
Spam emails and Fed rate cuts are quite different things – the one annoying and unnecessary; the other usually quite welcome and necessary. But spam and Fed rate cut history do share a common trait. They are both utterly predictable. Think of it this way: As you sit down at your desk each morning, you can predict that your email inbox will be littered with between one and 25 spam messages, depending on how long it's been since you last read your emails.
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In the same way, you can sit down at your desk and predict when a Fed rate cut is coming and how many basis points it will be. Really, it's easy. All you have to do is look at interest rates. And if you have a chart (see below) that compares interest rates with Fed rate cut history, you can see the pattern clearly enough to use it to predict the Fed's next move. Here's exactly how our chief analyst Steve Hochberg predicts a cut in Fed rates, according to this excerpt from his January 22, 2008, Short Term Update:
"On January 15 [2008] these pages said, “I think recent market action makes a ‘surprise’ fed rate cut highly probable before their next meeting on January 30. If so, expect a large rally in conjunction with the announcement. Until then, stocks may continue to trade ‘heavy.’”
"The U.S. Federal Reserve cut the Fed Funds rate by 75 basis points, from 4.25% to 3.5%, this morning [January 22], about an hour or so before the NYSE opened for trading…. For a myriad of reasons discussed in Conquer the Crash, The Elliott Wave Theorist and The Elliott Wave Financial Forecast, it won’t work.
"And forecasting fed rate cuts isn’t all it's cracked up to be, or at least it doesn’t appear to warrant the countless hours of discussion devoted to it on financial television. As we’ve discussed numerous times in our newsletters, the Fed follows the market, not leads it. This quasi-government entity simply validates what the freely traded Treasury market has already done. The above picture should be familiar to long-time subscribers and illustrates our point about the juxtaposition between the Fed and the freely traded T-bill market. With the current gap between the U.S. 90-day T-bill rate and Fed Funds at a wide 112 basis points, the Fed’s rate cutting is not over."
And Steve was right about the rate-cutting not being over. Over the next three regularly scheduled meetings in January, March, and April, the Federal Reserve cut its federal funds rate 50, 75 and 25 basis points (from 3.50 to 2.00).
One last word about spam – not only is it predictable; apparently, it's been with us longer than we may think. Although most of us became aware of the awesome ability of spam to clog our inboxes when Viagra first came out in 1998, it turns out that 2008 marks the 30th anniversary of the first spam that was ever sent. According to a story in The Washington Post, the first unsolicited commercial email arrived on the Arpanet (the government precursor to the Internet) on a Saturday in May 1978. It was from a computer salesman named Gary Thuerk who invited readers to come see his company's new computer at a presentation in California. One person who received the email posted this response: "This is a clear and flagrant abuse of the directory!" Nothing changes but it stays the same.
So, the next time you hear someone getting excited about whether the Fed might cut its rates again, just remember this chart about Fed rate cut history and then think of spam -- you know it's coming and you can even predict the amount.
Stay Up with the Fed's Rate Cuts
Our analysts have the number and the charts that explain what the Fed will do before the Fed does it. Try our
Financial Forecast Service and see for yourself.