The Crime of '98: Inside A Fed Watcher's Mind

The cognoscenti (and the really elderly) will remember that the Coinage Act of 1873, which set the U.S. solidly on the gold standard, was known in some circles as "The Crime of '73".

It wasn't really a crime and neither were the events 125 years later but again, in some circles...

Here's much more from FT Alphaville:

The Fed may be about to atone for the “mistake” of 1998

History never repeats and most analogies are wrong, but there are some intriguing parallels between the global macro environment in 1997-8 and today.

Back then, the Federal Reserve controversially chose to ease policy, first by refraining from rate hikes anticipated by the markets and then by cutting its target for Fed funds by 75 basis points. Many believe this choice inflated equity prices and encouraged excessive business investment at a time when America’s economy was already running hot.

Despite the subsequent fillips of tax cuts, a boom in defence spending, and a housing bubble, the aftermath was a massive decline in employment and painfully slow recovery.

A simple comparison between conditions then and now suggests the Fed’s explicit desire to “normalise” financial conditions may come from a desire to avoid repeating the experiences of the late 1990s. Whether policymakers are right to prioritise the real economic data, which tells us what’s already happened, over the action in the financial markets, which tends to affect what will happen, is anyone’s guess.

Recall what things were like in those heady bygone days:

• Oil prices had plunged by nearly 60 per cent from the start of 1997 through the end of 1998
• Spreads on high-yield bonds had widened by about 4 percentage points in 1998, while spreads on the junkiest junk debt had widened around 6 percentage points
• Currency crises and deep downturns were afflicting poorer countries from Latin America to Russia to Asia
• The US dollar had rocketed up more than 20 per cent from the start of 1997 through the end of August, 1998
• Core inflation had slowed from an annual rate of 2.0 per cent in June, 1997 to just 1.0 per cent by June, 1998 — the slowest rate ever recorded until 2010
• America’s unemployment rate had dropped by a percentage point to levels not experienced since March, 1970

Now compare to what we have now:

• Oil prices are down about 65 per cent since mid-2014
• Spreads on high-yield bonds are up around 3 percentage points since the start of 2014, while the spreads on debts rated CCC or lower have widened by nearly 9 percentage points
• Many large emerging markets, including Brazil, Russia, Turkey, and China, are either shrinking or slowing down sharply
• The dollar is up nearly 20 per cent since the summer of 2014
• Core inflation slowed from an annual rate of 1.7 per cent in July, 2014, to 1.3 per cent ever since the start of 2015
• America’s unemployment rate has dropped by a whopping 1.6 percentage points since the start of 2014

Both then and now, the employment data, the inflation numbers, and the financial markets were all implying significantly different scenarios, each with different policy implications.

Central bankers focused on the supposed connection between the wellbeing of workers and the rate of inflation, such as current Fed chair Janet Yellen, were itching to raise rates back in the mid-to-late 1990s. She wasn’t on the Federal Open Market Committee during the exact period we’re focusing on, but Yellen’s thinking from late 1996 is worth revisiting in this context. Here’s what she said at the meeting on September 24, 1996:...MUCH MORE