No. We say this because the history of the Fed is to follow market rates in implementing their own policy. Frequently, by the time the Fed has responded to the most recent run up or down the Reserve Bank is acting contrary to the prevailing trend. While this may appear accommodative when market rates are rising, it is merely a delayed reaction rather than intending to “help” the markets along in an accommodative manner.
1922-1930:
1923-1924:
While it is the history of the Federal Reserve to follow market rates, they somehow managed to claim to “put the brakes on…” speculation in 1923 and was willing to do the same in 1924.
1925:
Although no action was cited for raising rates, it was clear that speculation was a worry. A constant worry was that the banks not lend money for the purposes of speculation as found in the quote “No Federal Reserve Credits for Speculation.”
This commentary, “Sometimes an effective purpose of an advanced discount rate” means that raising rates is a strategy for avoiding the “poisons of speculative enthusiasm.” Of course, we know that this is not true as seen in the period from 1895-1920, 1942-1965, 2015-2019, and more recently from 2022-2024.
1926:
We know that the Federal Reserve was on guard about speculation getting out of control when the top commentors in finance said:
“…should the bulls carry their orgy much further, the Federal Reserve rediscount rate at New York would almost certainly be raised from 3½ to 4 per cent.”
There was some alarm over the fact that the Fed wasn’t doing enough to curb speculation. Legislators were anxious to give the Fed even more power to overrule the market.
“Dr. Miller said he would prepare definite proposals as amendments to the act which would retard Federal reserve money leaking into the speculative market.”
Of course the rate increased to 4% from 3½% in 1926 as all other rates were on the ascent until the beginning of 1927. Worth noting is the following quote:
“The expectations of the founders that the Federal reserve system would decrease speculation has not been realized…”
This is what happens when there are claims that we need to target speculation or promote stability, buffers are created that ultimately inhibit the market, if only temporarily.
"When a [Federal Reserve] banking system is proclaimed as a cure-all, failure to relieve any adverse condition tends to bring it into disrepute." "The fallacy of attempting to stabilize former by shifting latter." – Barron's. May 17, 1926.
1927:
This is the year of conspiracy theories and Federal Reserve rate policy. We’ll proceed with the data and the notes. The piece below starts off with:
“Forewarned is forearmed. The business world is being warned not to expect too much during the current year.”
This is almost an invitation to a boom. In modern parlance, the market climbs a wall of worry.
It is interesting to see the commentary from S.W. Straus, head of the nationally-known building mortgage firm:
“…warns that the country will be overbuilt unless the brakes are applied forthwith.”
Who is overbuilding? The person who heads a building finance company. Who should apply the brakes? Well, it could be the head of a building finance company. Except, rather than do it himself, he is implicitly asking for the Federal Reserve to do it for him. Until then, he is going to continue financing deals to stay up with his competitor competition.
Earlier we highlighted in 1926 that the Fed would “almost certainly” raise rates if speculation were to get out of hand. Well, brokers’ loan reached a level above the 1926 high at the same time that rates were temporarily cut.
Again, because the Fed follows and never leads the market, they were responding to the early 1927 peak in the call money rate nearly 9 months later. Meanwhile, brokers’ loans were exceeding the 1926 high.
By the end of 1927, the only message to be gleaned from the activities of the Federal Reserve are that they don’t know what they are doing and we should probably ignore them. This is probably where they lost it.
1928:
The year 1928 was one of aggressive rate hikes. Initially, it started with the regional branches which had the ability to increase rates independently of the New York Fed.
As noted in the above headline from January 1928, it was thought that a hike in New York wasn’t coming.
Days later, the New York Fed raised their rates. The reason?
“…its immediate purpose was fully understood to be the controlling or speculative tendencies which might have got out of hand…”
Again and again, the Fed attack on speculators with the increase of interest rates failed to curb the rise of the stock market.
“Even the marking up of Federal Reserve rediscount rates a second time failed to chill the bullish exuberance in Wall Street – this notwithstanding that the main argument for higher stock quotations used to be the prevalence of abundance of excessively cheap money.”
The year of 1929 was all too clear and predictable. However, the view that the Fed was accommodative is a misguided view. Some have claimed that the perception of being accommodative was due to the difference between real rates and the nominal rates. Historically, Markets react to nominal rates, economists theorize about real rates.
There is the perception that the Fed has control of markets and therefore is pushing stocks higher or forcing the price of gold down. These notions are simply that, notions. They have no merit to anyone without an agenda other that the facts & truth and willing to accept the long history of data that is now at our fingertips.
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