Fed Goes All Sliding Doors

Dear Reader,

We make thousands of different choices each day.

Every single one of those and their consequences have driven you to who you are and your life today.

But, it’s almost impossible not to wonder about the hypothetical.

What if…

…you had taken a gap year or two to travel the world…

…you had chosen a different career path…a different life partner…

…what if?

Would your life still look similar to what it does today?

Even the smallest decisions could technically change the course of your life.

What if you had stopped for a few minutes to talk to someone? What if you had taken the scenic drive instead of the most direct one?

What if you had missed the train home? That’s basically the premise of the 1998 movie Sliding Doors.

After getting fired, the main character in the movie — portrayed by Gwyneth Paltrow — misses her train and takes a later one. The movie then splits into two story lines: one where she makes her train and one where she doesn’t.

Missing that train completely changes the course of her life…at least for a while.

Anyway, the US Federal Reserve had their own ‘Sliding Doors’ moment this week. What if we hadn’t raised rates in 2015?

As Yahoo! reported:

Current and former Federal Reserve officials say the timing of its interest rate hikes between 2015 and 2018 may have been a mistake, a rare moment of humility spurred by the Fed’s adoption of a new framework for approaching inflation.

Lael Brainard and Richard Clarida, both serving on the Fed’s Board of Governors, said this week that the Fed may have curbed a quicker post-2008 recovery in the job market by lifting off of zero interest rates too soon.

As you may remember, central banks around the world decreased interest rates and began unconventional programs like quantitative easing to stave off the 2008 crisis.

When unemployment hit a low 5.1% in 2015, the Fed was worried the labour market was too hot and that it would push inflation above their 2% objective.

It was then the Fed started to raise rates from the record low of 0.25% in 2015 up to 2.5% in 2019. The idea was to go from those ultra-low rates back to normal to prepare for the next crisis.

Inflation never took off though, even when unemployment went on to decrease 3.5% this year, right before the pandemic hit. Or at least it didn’t on the Fed’s preferred measure of inflation. Yet, it’s questionable how accurate this measure is considering it excludes everyday items like energy and food.


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There’s also certainly been inflation into asset prices with the stock market at record highs even with the economy in shambles.

But back to the Fed’s ‘regret’, the argument is if they hadn’t raised rates in 2015, they would have reached 3.5% unemployment quicker.

Janet Yellen who was Fed chairman at the time, also weighed in on her decision to raise rates. As she said:

It’s fair to say if our goal had been to overshoot 2% inflation, perhaps we would have waited a little bit longer to start the process of raising interest rates. So there is some truth that it might have made some difference, but I don’t think it would have made an extreme difference.

Anyway, in a speech during their annual meeting at Jackson Hole, the Fed last week said they will be keeping interest rates at near zero while allowing inflation to run higher than their 2% inflation target.

That is, they won’t be making the same ‘mistake’ of raising rates again like they did in 2015, even if inflation goes above their target. This will make paying debt easier. It’s effectively negative real interest rates which, by the way, will be good for gold.

The Fed is asking the wrong ‘what if?

But a couple of points on this.

One, the Fed may be thinking they can control inflation, but that’s not easy to do.

Second, notice how they’re already prepping us to think that raising rates is a bad thing and that low interest rates are the way to go? Even if this means no growth and no return on your savings.

But mainly, I think the Fed is asking the wrong ‘what if?’.

What if they hadn’t flooded the system with money in 2008? What if they hadn’t manipulated the economy with these unconventional policies?

What if they didn’t keep using them? Remember back in 2008 they had said these would be temporary?

If so, we may have been in a better position and with less debt to fight this current crisis instead of going deeper down the rabbit hole. One that we will eventually need to pay off.

What if we let the economy run without intervention?


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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