Low-rate dilemma

While some in the financial world have argued that currency devaluing is a fundamentally flawed idea, there is perhaps some evidence that a quick shift to a low-rate environment has worked — right here in the U.S.

Think back to the post 9/11, post Nasdaq collapse recession in 2001. The U.S. entered 2001 with the fed funds rate at 6.5 percent. Amid signs of the weakening economy, the U.S. Fed embarked upon the now infamous rate-cut cycle that ultimately took the rates to 1 percent in mid-2003. During 2001 alone, however, the Fed cut rates from 6.5 percent to end the year at 1.75 percent.

“They continued on a fairly aggressive route, which suggested everyone was thinking ‘they are on it, they will give us a nice soft landing,’” Pressler says. “The thesis statement is that they did act and the recession only lasted eight months.”

The 2001 U.S. recession officially began in March 2001, but ended by November 2001. The Fed’s quick actions in 2001 compares to market perceptions that Japan’s response was almost passive during its five-year long foray toward a .50 percent rate.

At the time, the Fed’s move toward a 1 percent fed funds rate was heralded as a great success. Hindsight views that differently. Perhaps it wasn’t the rate cutting cycle to be blamed, but the rate hiking cycle; perhaps the Fed simply waited too long to start raising rates again. The Fed tugged the fed funds rate down to the 1 percent level in June 2003 and left it there for a year. The Fed didn’t start hiking rates until June 2004.

“They were proactive in bringing rates down, but by being reactive about bringing rates back up, they allowed an asset bubble to build which we are paying for now,” Pressler says.