Long Haul - A Very Long Turn

| October 27, 2023

Sometimes a little history helps us anticipate what might happen in the future. We are living in a time that is in some ways similar to that which led up to the Great Recession. One big difference is that we are not in a credit-driven housing bubble created by the federal government. We do have serious problems with commercial real estate, but that appears to be manageable. Time will tell.

The biggest similarity is Federal Reserve policy. The Fed attempted to counteract the government policies driving the housing excesses of that time by hiking rates. On June 20, 2004, the fed funds rate was 1.00%. The Fed steadily hiked the rate until it hit 5.26% on July 30, 2006. They then held relatively steady, paused in the lingo, until beginning to cut rates in September of 2007. The recession did not begin until that December, as the picture below shows. The gray bars are recessions.

Talking heads and other pundits announce every jot and jiggle in Fed policy as if the American economy turns like a speedboat. Instead, our economy is more like an oil tanker that takes miles to turn. We cannot actually perceive the beginning until the turn is well under way.

The fed funds rate was 5.33% on October 8. We are getting closer to a pause in rate hikes. If history is a guide, the Fed will start cutting rates after it is too late to avoid a recession. That may be a while yet. I want our clients to understand that it took more than three years before the Fed cut rates in an attempt to avoid a serious recession. Their attempt failed. We should all be prepared for a long haul in this cycle and not be tricked by talking heads and pundits. There are opportunities ahead for the patient among us to lock in great income long into the future.

I shall explore this further in the upcoming newsletter.


Federal Funds Effective Rate (DFF) | FRED | St. Louis Fed (stlouisfed.org). https://fred.stlouisfed.org/series/DFF. Accessed on 10.24.2023.