Last week, Stanley Fisher, Vice-Chair of the Federal Reserve (the Fed), unexpectedly announced that he will be stepping down. This means uncertainty as to who will fill both the #1 and #2 leadership positons at the Fed, not to mention several other vacancies on the Board of Governors. However, while a change in leadership can certainly impact monetary policy, it is worth recalling that dovish monetary policy precedes the current leadership. In fact, a tradition of easy money goes back nearly 20 years, a trend that has shaped most investor portfolios. Just how big an impact this dovish monetary policy has had can be seen by real-i.e., inflation-adjusted-interest rates. While there is no single, correct measure of monetary policy, this is a good proxy. Over the very long term the real federal funds rate (RFFR)-defined as the effective fed funds rate minus the one-year change in the Consumer Price Index-has averaged around 1.25%. However, that average masks significant variation. Back in the late 1970s, the RFFR was consistently negative as central bankers struggled to adjust to an unexpected surge in prices. That dynamic changed under Fed Chair Paul Volcker. The Volcker Fed aggressively raised rates, taming inflation in the process. However, real rates remained stubbornly high for years as everyone awaited the eventual return of inflation. As we now know, it never came. Instead, what changed was the U.S. trend growth rate, a shift that occurred around the time of the tech-bubble collapse. As both real and nominal growth slowed, monetary policy took on a very different hue. With the exception of a short-lived tightening cycle in 2005-2006, the RFFR has tended to be negative since 2001. See chart below.
Real federal funds rate
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