The Federal Reserve isn’t talked about within the films “The Huge Quick” or “Margin Name”, however The Fed’s coverage errors performed a giant function within the demise of Fannie Mae’s and Freddie Mac’s fairness costs.
Here’s a chart of The Fed’s many insurance policies errors. Let’s begin with The Fed decreasing charges too quick across the 2001 recession. They pushed their goal charge from 6.5% in December 2000 right down to 1.75% after one 12 months after which right down to 1% (PE1). As dwelling worth progress accelerated, The Fed engaged of their second coverage error — elevating charges too quick leading to a dramatic cooling of dwelling worth progress. Then got here Coverage Error 3: the dropping of The Fed Funds Goal charge from 5.25% in September 2007 to an eventual 0.25% in December 2008.
With the election of President Obama, The Fed engaged in Coverage Error 4: retaining The Fed Funds Goal charge too low for too lengthy, mixed with their huge asset buy packages (QE).
Lastly, The Fed (underneath Yellen) lastly raised The Fed’s goal charge ONCE underneath Obama, however began elevating charges as soon as Trump was elected. The Fed additionally slowed their QE underneath Trump which as known as “Fed coverage NORMALIZATION.” Then COVID struck and The Fed engaged in Coverage Error 5: retaining charges too low for too lengthy … once more whereas massively increasing their stability sheet.
Fannie Mae and Freddie Mac, the DC mortgage giants had been executed in by The Fed’s whipsaw Coverage Error machine.
Now we’re embarking on PE 5: Powell and The Fed Gang not elevating charges however signalling that they are going to. Just like the play “Ready for Godot.”
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