Now and Then

PaulsonThe headlines on June 29, 2006 were fairly unremarkable.  The House voted to end the offshore drilling ban.  The Devil Wears Prada was being released in theaters.  And, the Senate confirmed new Treasury Secretary Lord Voldemort Hank Paulson — who was paid $48 million to take the job and subsequently ushered in the worst financial crisis since the Great Depression.

It was also the last time the FOMC increased the Fed Funds rate (the 17th hike in a row, to 5.25%.)  I’ve scoured the news, and can’t find a single headline from back then warning of impending financial armageddon from the increase.

In fact, the market rallied 2.1% over the next several days — before shedding 4.4% a week later.  But, beyond the immediate effects, two things stand out from the historical data:

  • the S&P 500 gained 26.5% over the next 16 months as the FOMC reversed course and lowered rates through the peak in Oct 2007 (and, of course, throughout the subsequent crash)
  • the FOMC had no frikkin’ idea how to manage the economy via rate changes.

Now, 3,451 days later, we’re told the Fed might raise rates again.  How can we expect the “markets” to react?

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