wpe1E.jpg (33803 bytes)

         Daily Blog - Tiger Software

                            August 19, 2007
Updated 1/24/2008

Federal Reserve Discount Rate Changes
            and Stock Price Movements


William Schmidt,     - Tiger Software's Creator
      (C) 2007 William Schmidt, Ph. D.  - All Rights Reserved. 

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      without explicit written consent by its author is permitted.

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     It Pays To Understand How Political The Fed Really Is
     and To Use PeerlesS Stock Market Timing!

                                                    Background and Defnitions.

               As much as any Washington institution, the Fed determines whether your business will
      grow or shrink, whether your stock portfolio will provide for retirement or you will not be
      able to retire and whether your neighbor will have a job or he will get laid off.  The Fed
      Chairmen serve for  4 year terms, but usually much longer due to how massive is their
      authority and power.  The Chairman is one of the seven Governors appointed by the President
      and confiremd by the Senate.  Each of these Governors serves a 14-year term!  Hence
      the independence of the FRB.

               The Discount Rate is set by the Fed.  This is the rate of interest member banks
     are charged when they borrow from a Federal Reserve bank.  The other key FED instrument
     of interest rates is the Federal Funds Rate.   Changes in the Fed Discount Rate typically
     are followed by changes in the Fed Funds rate in the same direction and by about the
     same magnitude.  This is the interest rate at which private banks lend balances at the
     Federal Reserve to other private depository insttitutions.   

               In this study, I am mainly concerned  with changes in the Fed's Discount Rate from
     1955 to 2007 and how they impact the stock market.   Because the Federal Reserve
      is so powerful,  it is necessarily highly political, despite pretensions of independence.  Actually,
      it is its political nature which makes it most predictable.  Here is a review of 52 years
     of Fed  Discount Rate changes, their politics and their impact on stock prices. 

              During Presidential Election years, politics intrudes especially obviously.  Is the
      Fed likely to reduce rates in September and October in these years more than
      in other years when there is no Presidential Election.    It is sometimes mistakenly
      said that the Fed) cannot do anything in October of these years.  Sam Stoval is quoted
      as saying the opposite is true.   In the 9 presidential election years since 1976, the Fed
      has done "something" in August, September and October 7 times.  (Source).  

             The data I set out here can be used to provide a historical check on such statements.
      I will be using this myself repeatedly in pur Tiger/Peerless Hotline.

                                          Rate Hikes Are Bearish.

     I think you will agree from the data below that 3 discount rate hikes is normally bearish.
     Doing this in a short period of time, 3 month, is very likely to drop the market
     more than 10%.  This was true  on 9/22/1978.   
     When rates were very low to begin with, as in 2002, three small rate highes
     did not stop the market in September 2004.  In this case, the market
     when it started rising got used to the 1/4% rate hikes, much like the frog in water
     graudually brought to a boil. 

     Big jumps in rates, by 1/2% in one accouncement are very likely to bring a 10% DJI
     drop of more.  This was true in the aftermath if the rate hikes of
     8/23/1957, 2/26/1973, 4/25/1974,  4/9/1984, 9/4/1987, 8/16/1994 and 5/16/2000.  



   Chairmen of the Federal Board of Governors

  1. Charles S. Hamlin (August 10, 1914August 10, 1916)                2 years
  2. William P. G. Harding (August 10, 1916August 9, 1922)            6 years
  3. Daniel R. Crissinger (May 1, 1923September 15, 1927)           4 years
  4. Roy A. Young (October 4, 1927August 31, 1930)                       3 years
  5. Eugene Meyer (September 16, 1930May 10, 1933)                  3 years
  6. Eugene R. Black (May 19, 1933August 15, 1934)                     1 year
  7. Marriner S. Eccles (November 15, 1934February 3, 1948)   14 years
  8. Thomas B. McCabe (April 15, 1948April 2, 1951)                     3 years
  9. William McChesney Martin, Jr. (April 2, 1951February 1, 1970)     19 years
    "The job of the Federal Reserve is to take away the punch bowl just when the party
       starts getting interesting."   After the presidential election of 1960, GOP candidate
       Richard Nixon blamed his defeat on Martin's tight-money policies.
  10. Arthur F. Burns (February 1, 1970January 31, 1978)                 8 years
  11. G. William Miller (March 8, 1978August 6, 1979)                     1 year  
  12. Paul A. Volcker (August 6, 1979August 11, 1987)                      8 years
  13. Alan Greenspan (August 11, 1987January 31, 2006)               19 years
  14. Ben Bernanke (February 1, 2006 – )

    (Source: http://en.wikipedia.org/wiki/Chairman_of_the_Federal_Reserve   )

                                           The Fed's Friday  Surprise

After denying it would cut the Discount Rate, the Fed did what Wall Street wanted,  It did cut
       the Discount Rate by 1/2% last Friday.    What will that mean for the market?  Look through
       the history of rate changes, market conditions and Peerless signals and I hope you will get a
       keener insight into how the Fed acts, how political it is and what the likely outcome for stocks will be.

            Next year is the year of the Presidential Election.  The Fed is now run by Republicans.
       Everything we know about the Bush White House shows how Republican partisianship is the
       most important qualification for most appointments, including those who sit on the Board
       of  Governors who vote on decisions to raise and lower the discount rate, which sets the interest
       rate banks must pay to borrow money from the Fed.  

        wpe5.jpg (4831 bytes)   
 Bernacke is a scholar with a special interest   
       in the monetary mistakes that led to the Great Depression.  He is also |
       methodical and, according  to one of his MIT classmates whom I have talked with,
       painfully slow to articulate what others are already thnkiing,  But each time
       he speaks, unlike Greenspan, Volcker or Bush, the market seems to rally. 
       He seems eager to win praise and finds it especially difficult to displease. 
       These are qualities of decency that I certainly admire.   I think he will do
       whatever he can to avoid much more of a sell-off in the market.  But is
       monetary policy enough?  And what will he do when a Democrat takes over
       in 2009? That's when the Fed usually tightens monetary policy.  Will that
       puncture the hyper-inflated balloon of expanded credit?

          Having said this, I should note that the Peerless System is a much better predictor of
       the market than Fed watching normally is.  This is because of how often word gets out in
       advance about what the Fed will be doing.  The DJI, for example, turned around at 12500
       on Thursday mid-day and then jumped to 13175 on the announcement.  "Somebody
       always knows."  And they sold on the accouncement on Friday at the high for the day!

Don't Fight The Fed" Is Way Too Simple A Rule  To Use.

          We want here also to test the proposition that three or more discount rate hikes in 6 months
       is very bearish.  Some call this the "3 jumps and stumble" rule.  These ideas have appeared
       occasionally n Barrons.  In the listing of signals in the second half of this report, I use "***"
       to indicate this was the third consecutive rise in the Discount Rate in six months.   It may surprise
       you that this rule succeeded only five times and that it failed three times, since 1955.   Insiders
       usually have gotten wind of the plans to raise the Discount Rate, so often the market has
       already significantly declined  when the the third hike is announced.  There are many more
       reliable ways to predict the market.   See the discussion of the 1970 bottom, for example.
       And in declining markets, there is always the possibility that rates will have to be lowered
       many more than three times to turn up a stock market in serious decline.  Look at how many
       rate cuts were needed by Greenspan to turn the stock market up after 2001.

                                                  3 rises in 6 months:

                             9/9/1955 - DJI fell from 477 to 442 in a month and then entered a trading range
                                              between 466 and 520 for a year.
                            3/6/1959     DJI rose from 615 to  680 in next 4 months and then pulled back to 620 in next two.
                            5/4/1973     DJI was in early stages of a bear maket that would last another 19 months.
                            1/9/1978     DJI fell from 780 to 750 in next 3 months and then began rising for 7 months.
                            9/19/1979   DJI fell sharply from 880 to 800 on 6 weeks.
                          12/5/1980     DJI rose from 925 to 1020  in four months and then fell to 825 in the next 5 months,
                          11/15/1994   DJI fell from 3828 to 3775 in a month and then began a bull market. 
                            5/16/2000   DJI began a 34 month bear market. 
                            8/10/2004   DJI immediately started to rise from 9800 amd hit 10950 in six months.

    wpe4.jpg (4289 bytes)                                                    
    Fed Chairman Wm.McChesney Martin: 1951 to 1970

                                                                 1956 and 1960
The Fed has tried to seem non-partisian and independent.  But we may safely, I think,
       predict that they will do all they can to prop up the stock market through the end of next year.
       It did not used to be this way.  While Eisenhower was President, the Fed raised rates as
       his re-election in November 1956 came closer. But then the Fed Chairman had been appointed
       by a Democrat, Truman.     See the Fed's six rate hikes, shown below, between
       8/15/1955 and  8/24/1956.  They did much the same thing before the 1960 Presidential race.
       There were five rate hikes, but also a key rate decline five months before the November
       1960 Presidential Election.  Broad trading ranges dominated most of 1956 and 1960.  The
       Fed wanted to preserve the appearance of independence.  Its actions stabalized the market
       at this time, to avoid drawing attention to itself and to avoid making its own actions become
       the subject of the campaign. 

         wpe4.jpg (7127 bytes)            1960

"When Vice President Richard Nixon was running for President in 1959-1960, the Fed was
       undertaking a monetary tightening policy that resulted in a recession in April 1960. In his book
       Six Crises, Nixon later blamed his defeat in 1960 in part on Fed policy and the resulting tight
       credit conditions and slow growth. After finally winning the presidential election of 1968, Nixon
       named Burns to the Fed Chairmanship in 1970 with instructions to ensure easy access to credit
       when Nixon was running for reelection in 1972.[1]    Later, when Burns resisted, negative press
       about him was planted in newspapers and, under the threat of legislation to dilute the Fed's
       influence, Burns and other Governors succumbed.[3][4] Inflation resulted, which Nixon attempted
       to manage through wage and price controls while the Fed under Burns maintained an expansive
       monetary policy. After the 1972 election, price controls began to fail and by 1974, the inflation rate
       was 12.3 percent.[1]" (Source:   http://en.wikipedia.org/wiki/Arthur_F._Burns )
       See also http://www.fame.org/HTM/Creating%20More%20Fiat%20Money%20and%20Winning%20an%20Election%20Bresiger%20Burns%204.htm )

With Kennedy elected in a close race, the Fed was unusually quiescent.  It did not
       raise rates until July 17, 1963.  It also did not intervene positively in the panic that followed
       the Cuban Missle Crissi in the Fall of 1962.   Perhaps, recognizing the 1964 Election was going
       to be by a landslide of sympathy for the Democrats, because of  the assasination of JFK in
      November 1963, the Feds sat on their hands throughout the 1964 Presidential Election campaign. 
      As a result the 1964 stock market continued the same gentle upwards trend it had shown in 1963.

  The Fed raised rates for the most part in the year before the 1968 Presidential Election,
         raising them in November 1967 (which helped send the market down until March 1968),
         as well as in March and May of 1968.   With the US war in Viet Nam raging in 1968 and
         the country dealing with widespread civic unrest set off by the assassinations of Martin
         Luther King and Robert Kennedy, the Fed lowered the Discount rate by a mild 1/4%,
         but raised margin requirements.  No effort was made to help another  Democrat to
         stay in the White House.  Economic news played second fiddle anyway to the war in
         Viet Nam.

           wpe4.jpg (14333 bytes)   Arthur Burns was appointed by Nixon is 1970 and
          served as Fed Chairman until 1978,

The Fed decided to drop the stock market very early in the new Republican President's
         tenure.  It raised the Discount rate from 5.25% to 6.0% by April 4th, 1969.  And the
         stock market fell sharply.  (See Peerless charts of DJI below).  The DJI fell from 970
         in May 1969 to 540 in May 1970.   Articles have appeared in Barron's suggesting the
         utility of watching for three successive Discount Rate/Fed Funds Rate hikes before
         selling out and three successive Discount Rate/Fed Funds Rate declines before buying.
         Multiple Peerless major Sell signals work better, especially after only two Discount
         Rate Hikes or Declines.  Thus, Peerless gave many major Buy signals from May 1970
         to the end of the year.  The Fed showed it wanted the stock market to rise by lowering
         the Discount Rate fives times between November 1970 and February 1971.  The DJI
         responded by roaring ahead, setting up the Republican Richard Nixon with a strong
         market going into the 1972 Presidential Election. 

             When Nixon's 1971 New Economic Plan  made investors fear that wages, prices and
        possibly incomes might be controlled, the stock market fell sharply.   Nixon privately demanded
        the Fed cut interest rates and Burns stop stressing "fears of inflation" in his appearances
        before Congress.  Adding to his pressure on the Fed,  Nixon even let it be known that
        he was considering backing legislation which would expand the number of Fed Governors.
        This would let him "pack" the Fed with supporters who would back his more expansionist policies.

        He even spread a rumor that Burns wanted a $20,000 raise.  

  Not surprisingly, the FED succumbed to this pressure.  Burns had been Fed Chairman
        little more than a year.  So, he accomodated the President.  He cut the Discount Rate in
        November and December of 1971.  That quickly had the desired effect and sent the market
        up sharply from a 790 low to 960 in the summer of 1972, the Presidential Election year.  Nixon
        got what he wanted and was re-elected by a wide margin in November 1972. 

            My conclusions are supported here by conservative writer Bruce Bartlett. 
       "The inflation of the 1970s came about primarily because Fed Chairman Arthur Burns gunned
        the money supply to get Richard Nixon re-elected in 1972."  

        See discussion between Nixon and Burns on Nixon Tapes.


With a Republican re-elected, the Fed decided to follow the same approach that
         they had used so effectively in 1969.   They immediately set about bringing a  market
         decline early in the incumbent's four year tenure, so that they would have plenty of time to
         make conditions turn-around before the 1976 Presidential year.  They raised rates steeply,
        sending them from 4.5% to 7.5% by August 14, 1973.  The market swooned.  The previous
        bull market had been much more limited to blue chip and energy related stocks.  With the
        DJI down already from 1050 to 875, they even raised rates again in April 1974 to 8.0%.
        The DJI then plunged sharply as Richard Nixon resigned, rather than face impeachment.

            By December 1974 the DJI had fallen 40%, from 1050 in January 1973 to 580.  Many
        smaller stocks were down 80% or 90%.   Finally, on December 9th, 1974 the Fed signalled
        they wanted the market to stop declining.   They lowered rates by only 1/4%.  It was enough
        to send the extremely oversold market up.   The Fed then lowered the Discount rate 4 more
        times by May, 1975.  Rates still stood at 6.0% until the Election Year.  In January 1976,
        they lowered the rates one more time, to 5.5%.   That had the desired effect and the DJI
        rose from 900 to nearly 1000.  The markets anticipated this rate cut by starting up a
        month earlier and breaking out of a well-defined trading range backed by a Peerless Buy
       in November.  The stock market then went sidewise again for the mast 8 months of 1976
       and the Fed avoided public notice during the Presidential Election Year when it might
       otherwise have become the subject of political debate.

        wpe6.jpg (3431 bytes)                                              1977-1980

Discount rates went up and up with Democrat Carter in the White House.  The pattern of
       allowing a stock market decline the year after the Presidential Election year (i.e. 1957, 1969,
       1973, 1977 and 1981) continued.  The Discount Rate rose from 5.25% to 6.5% as the
       stock market fell.  After the DJI had fallen 26%, it bottomed in March 1978.  A perfect
       example of an inverted head and shoulders bottom appeared.  So did a major Peerless Buy,
       right at the bottom.  The market rebounded strongly without Fed help.  The Fed was willing
       to allow more market weakness, as they raised interest rates over and over again.  On
       9/22/1978 they increased the Discount Rate to 8.0%.   This was the fourth rise in four months.
       Then they did it again on 10/16//78, pegging it at 8.5%.  This and a very timely Peerless Sell
       sent the DJI into the  "October 1978 Massacre".  And it did not stop there.  The Fed repeated
       the same pattern in 1979, raising rates for four straight months, until they stood at 12.0%.
       This brought on the "October 1979 Massacre", also called perfectly by Peerless major Sells.

            As if to show Democrats, that they would not tolerate them in the White House, the Fed
       raised rates to 13.0% on February 15, 1980.   This and a new set of Peerless Sells caused
       the "Bunker Hunt panic" of March 1980.    At this point, the Fed must have realized that
       their extremely tight money policies could, if continued, easily become the subject of debate
       in the 1980 Presidential Election Year.  They finally  lowered rates to 11.0% in June 1980
       and a mere  (sarcasm here!) 10% in July 1980.   But to be sure Carter would not be re-elected,
       they raised rates back to 11.0% six weeks before the Election.  The Fed's actions in
       dramatically raising interest rates went a long ways in defeating Carter and making him
       look ineffectual. 

      wpe5.jpg (1954 bytes)  Paul Volcker - P[resident of the Federal Reserve Bank of New York from
      1975 to 1979, Chairmanship of the Federal Reserve - 1979 to 1987

"Tight Money" Paul Volcker was appointed by Carter in August 1979 to be Federal Reserve
       Chairman.  He had been UnderScretary of the Treasury under Richard Nixon.  Volcker sabotaged
       Carter and the peanut farmer - nuclear engineer from Georgia never even saw it coming!  Volcker
       used the excuse of rising commodity prices to raise interest under Reagan, too, but it was early
       in Reagan's Administration that he did this.  At the time, Carter was seen as having made a dire
       mistake.  He has put "Dracula in charge of the blood bank.  To us, it meas a crash ... is more
       likely than ever."   Why did Carter make this mistake?  More may be written about that here.
       Suffice it say now that Carter was naive and trusted Republican and NY banker David Rockefeller.
       Volker testified before Congress for eight years.   I was always surprised that Congress accepted
       his testimony and the economic suffering his tight money caused with relatively little criticism,
       apart from home builders and union representatives.   He surely made a lot of wealthy fixed income
       people happy!  They apparently have much mnre influence. 
             Volcker raised the Discount Rate to a high of  14% by April 1981.  By October, the DJI had
       fallen to 820 and  he started to ease off his anti-inflation throttle.  In November and December
      1981, he lowered the rates to  12%.  When the market started to sink again in 1982, he lowered
      the Discount Rate no less than seven times by December 1982, to 8.5%.  That, of course, launched
      a very rapid rise in the stock market.  Real-time, we got a record number of major Buys at this time.
      The DJI went from a low of 780 in Auhust to 1075 by the end of 1982.   Volcker was certainly aware
      that his renomination to continue as Fed Chairman in mid 1983 required him to show he knew how to
      lower rates, too. 

Volcker returned to his tight money policies once more.  That was in April 1984 and while
     the market was correcting from its 50% advannce since August 1982.  It continued down until
     late July and then surged upwards.  Investors remembered the similar take-off in the late Summer
     only two years before.   Volcker obliged the market and steadily lowered interest rates for
     the rest of his term in office.  By then the DJI was well above 2400, up 200% from the August
     1982 bottom.  This made Reoublicans look very good at running the economy.

     wpe1.jpg (41668 bytes)  President Reagan appointed Alan Greenspan (left)
        to replace Paul Volcker (center) as chairman of the Federal Reserve Board in June 1987.


                                                                            1987 - 1992
       wpe5.jpg (21259 bytes)

Greenspan was made Chairman of the Fed  in June 1987.  Early in September with the
        DJI at 2500, the Fed raised the Discount rate to 6.0%.  The Fed Funds rate had been
        6.1% in February 1987 when the stock market was romping upwards. It rose to 6.73%
        in August and then 7.22% in September under Greenspan.    Fed watchers got "spooked". 
       Was this to be a return to the "tight money" policies of Volcker?  The DJI rallied and everthing
        seemed fine in early October.  But Peerless gave a real-time major Sell from all its three most
        important indicators.  And within three weeks the DJI had plunged from 2600 to 1740!  The
        Fed did not cut the Discount Rate, but they did give private guarantees to brokerages and Specialists
        that they wpuld get all the credit they needed to weather the panic.  And   the Fed Funds rate
        was slashed by an unprecedented 60 basis points.  This was a demonstration that the Fed would
        prevent a repeat of 1929.

                                         The Slash in Fed Funds Rate in 1987 Was not
                         without negative consequences.  The Dollar fell sharply.

                wpe7.jpg (21728 bytes)

                wpe6.jpg (23909 bytes)

                  (Source: http://www.financialsense.com/editorials/vronsky/2007/0817.html )


   The Fed raised the Discount Rate  just once in 1988 and one again in 1989, to 7.0%. 
       When the stock  market plunged 20% with Iraq's invasion of Kuwait, the Fed lowered rates
       in December and  again in February to 6.0%.  That boosted the market, as did the pride of a
       swift military victory by an international force led by the US to remove Iraq from Kuwait. 

              The Fed soon set about to drop interest rates and boost the chances of getting Bush I
      re-elected in November 1992.  The Discount Rate fell dramaticaly from 6.0% in February 1991 to
      3.5% in December 1991.  Not surprisingly, this lifted the stock market, even as fears
     of an enveloping savings and loan scandal grew.   By July 1992, Greenspan and company
     had lowered rates to 3.0%.  Surprisingly, it was not enough.   I still recall watching Bush look at his
     watch during the Presidential debate with Clinton.  That was a serious mistake. 

  1992 - 1996

Greenspan and the Fed did not raise rates the year after Clinton took office, as the Fed
     usually has done.  I argue that this is normally done when a Republican is in the White House,
     so that rates can be cut in the second half of his term to give the public a rosier view of the economy
     during the Presidential Election year.  Whatever the reason, the Fed waited.  And then
     early in 1994, without any apparent good reason, Greenspan started talking about tightening
     rates.  The DJI quickly fell 10% and started working its way back up.  To drive it back
     down, the Fed raised the rates three more times by February 1, 2005. 

       John Kenneth Galbraith, the well-known liberal economic historian wrote of Greenspan
     in 1995.   
                                             Greenspan's 3 Billion Dollar Connection
                                To Savings & Loan Swindler Charles Keating.

"In 1994 he virtually wrecked Clinton's first term, by raising interest rates immediately
            after the 1993 deficit reductions, which were supposed to bring rates down, passed into law.
            The destructiveness of that
1994 action is now clear. Whatever happened to the threat
            of inflation?  It never existed.  The economy last year was actually much more fragile
Greenspan thought.

          "Can't anyone make a mistake?   Yes, but this is not the first time. A bias toward high
            interest rates and high unemployment is part of Mr.
Greenspan's personal, political,
            and ideological fabric. It is not accidental. It is systematic.

          "Personally, Alan Greenspan is a very, very conservative man, not a run-of-the-mill
           conservative but a philosophical extremist.  Long sympathetic to the gold lobby, he
           once gave one thousand dollars, I'm reliably told -- a thousand dollars! -- to the 1984
           reeelection campaign of the Senate's most powerful reactionary (and closet gold bug),
           Senator Jesse Helms.

         "Indeed,  Greenspan's entire professional life has been devoted to the service of the
           rich. His early ideology, as a follower of Ayn Rand, celebrated such service. And his
           later career, private and public, confirms that the rich and powerful are the people
           he respects, admires, and works for.

         "In the mid-1980s, these leanings took Greenspan into the orbit of Charles Keating, the
          highest flyer in the Savings and Loan industry at that time. Keating's Lincoln Savings
          and Loan Association was in trouble, as regulators wised up to its real estate scams.
          Keating needed lots of help. Greenspan, then a private consultant, obliged. On one day for
          which we have records, December 17, 1984, Mr. Greenspan traveled to Washington to lobby
          on behalf of Mr. Keating. Greenspan's personal fee for that one day was $12,000.

"What kind of work did Keating get?   On February 13, 1985, Greenspan wrote a long
           letter to the principal supervisory agent of the Federal Home Loan Bank in San Francisco.
           In it, he committed his vast prestige to the proposition that Lincoln and Keating presented
          "no foreseeable risk to the Federal Savings and Loan Insurance Corporation....

        "In fact, Lincoln Savings and Loan Association was at the heart of a massive fraud; those
         'sound and profitable direct investments' were mostly worthless. The collapse, when it
        came, by itself cost American taxpayers over three billion dollars, more

        than any other single S&L.   It resulted in more than six felony convictions, including
          that of Charles Keating."

          Galbraith wrote this to get Clinton to reconsider his plans to reappount Greenspan in 1995.
          Such is the fear of antagonizing Wall Street that Clinton reappointed Greenspan not only
          in 1995, but also in 2000.    (Source: http://www.geocities.com/jurisnot/quid_pro_quo_in_actiontgtbj.html )

        See also   http://www.pbs.org/newshour/bb/business/fed_2-21.html

                                                            Internet Boom

           Though the market wobbled in late 1994, after a perfect Peerless major Sell, it righted itself
     and started moving higher.  A few weeks later the DJI, SP-500 and NASDAQ all had broken
     into new all-time high territory and were advancing steeply.  The Internet Boom had started. 
     The Fed had tried to reign in the advance, presumably not liking the idea of an incumbent Democrat
     being  re-elected.   But they had failed.  Greenspan even took his hat off to Clinton on January 31, 1996
     by nominally lower the Discount Rate to 5.0%, still two percentage points higher than it
     had been when Bush I ran for re-election. 


        The stock market rocketted upwards sharply from 1995 to 2000.  The Fed helped this
    wonderful time by lowering interest rates from 5.0% to 4.5% in October and November 1998,
    after the DJI had fallen back 20% from its Summer highs.  

    wpe7.jpg (6474 bytes)      Clintom reappointed Greenspan on January 4, 2000
    CNN wrote at the time:  "Praise for Greenspan stems partly from his prominent role in steering
    the U.S. and global economies away from several near-recessions, the savings and loan crisis
    of the late-1980s, the overheating U.S. economy of 1994, the Asian financial crisis in 1997,
    and the Russian debt crisis and Long-Term Capital Management bailout in late 1998."  The
    DJI fell from 11,358 to 10,998, or 360 points on the announcement.   Insiders know interest rates
    would soon be raised and the speulative bubble pierced.  Did Greenspan simply wait for his
    reappointment before raising rates and starting the longest bear market since the early 1930s?

          By the Presidential Election year 2000, it was clear to most that there had been a wildly
    speculative boom in unseasoned internet stocks.  Instead of raising margin requirements, which
    had been done in 1968 very effectively to stop excess speculation in low priced stocks, the Fed
    under Greenspan sought to burst the bubble from August 1999 to April 2000, during which time
    the Discount Rate was raised on five occasions, from 4.5% to 6.0%.  The effort worked.   The
    stock market started sagging even before the Election in November.  The NASDAQ lost 50%
    from its March high to the end of the year.  And the Republican Bush II was elected President
   in a very narrow race that the Supreme Court decided.

      wpe4.jpg (49795 bytes)

                   Clintom reappointed Greenspan om January 4, 2000.   wpe7.jpg (6474 bytes)


  The Fed started the bear market of 2001-2003 by tightening interest rates to stop the
      speculative dot.com binge and to help the Republican Bush II to get elected.  It took a lot more
      of rate cuts than they probably expected to finally stop the decline, made worse by 9/11 terrorism
      and the extreme hangover consequences from the wild late 90's internet craze.  Finally, the Discount
      Rate had to be lowered to 3/4%!  That worked.  In March 2003 the DJI started rising.  It had fallen
      from a high of 11,700 to a low near 7,500.

     wpe6.jpg (24468 bytes)    wpe8.jpg (5493 bytes)

Greenspan never tried to hide his Republican bias.  He certainly went beyond his job description
      and supported Bush's 2001 tax cut plans and proposal to phase out Social Security in favor of
      private retirement accounts.  But he was not such a partisian that would allow a runaway stock
      market, as had occurred under Clinton in the 90's.  He raised Discount Rate by 1/4% five times
      in 2004.  That put the market into a typical Presidential Election Year trading range or holding
      pattern.  He rised it nine more times in 2005, each by 1/4%.  That still left rates at 5.5%
      going into 2006.   The stock market rose steadily without a 10% correction in the DJI until 2007 

          Ben Barnacke became Chairman of the Fed  in February 2006.  By May 2006, it was getting
     difficult to raise rates without bringing the market down.    When rates were raised on May 10th,
     2006, just a few days after a Peerless major Sell, stock prices began to fall sharply.  The DJI
     managed only to fall by 6%, but world markets and the NASDAQ fell more than 20%.  How could
     the Fed bring the market into a smooth decline?  That became the burning question for the
     new Federal Reserve Chairman whose academic interest had been the Great Depression and
    the monetary policies that he believed made it happen.    Cautiously, he raised rates to 6.25% in
    June 2006 and then signalled he would not be raising them again.   In this he was following the
    examples of the previous Republican Fed Governors when a close or key Presidential Election year was
    approaching, notably Volker in 1983 and Greenspan in 1991 and 2002-2003. 


   Under pressure from Wall Street to lower the Discount Rate to avert a financial panic,
    as Greenspan had done in 1998, Bernacke acquiesced and lowerd the rate this Friday by 1/2%.
    There is a difference. Greenspan waited for the stock market to fall nearly 20% before doing this
    1998.  Bernacke is trying to head off such a decline early.   His action, of a 1/2% rate cut shows
    intent.  And most traders will tell you, "Don't Fight The Fed".  I would say, at least, until there are
    very clear signs that we have started a bear market, it is safer to believe the Fed will prevail than
    it will not.  Fed rate cuts in a rising market tend to push the market higher.  Lows like those made recently
   tend to hold. 

           wpe5.jpg (28055 bytes)

            It takes more and more "liquidity" (i.e. national
            debt to keep the bubble from popping.


Discont Rate Changes: 1955 - 2007
                  Peerless Buy and Signal Signals on Charts of DJI


               Republican in White House.                        
                                         4/15/55                     1.50% to
1.75%   mkt fell from upper band to lower band and then kept rising.
2.0%    mkt rose from lower band to above upper band and pulled back again.
                                ***    9/9/1955                                  
2.25%  mkt fell from upper band and made a 10% decline from highs.
2.50%  mkt went sidewise in bullish end of year season
                A55.GIF (13597 bytes)                       

4/13/1956                       2.75% This brings 10% correction.
   8/24/1956                        3.0%   This brings another 10% correction from recent highs.
                wpe1C5.jpg (53008 bytes) 
   8/23/1957                                       3.50%  Brought an additional 10% drop.
11/15/1957                                     3.00%  Brought decline to lower band.
Then brought rising prices.

   01/24/1958                                   2.75%      Brought decline to lower band.
Then brought rising prices. 
03/07/1958                                    2.25% -1.2%   Brought decline to lower band.
  Then brought rising prices. 
04/18/1958                                    1.75% -1/2%   Brought upside breakout and rising prices.
                    A5758.GIF (12642 bytes)
09/12/1958,                                  2.00  Had no effect.
11/07/1958,                                   2.50  Brought decline to lower band and resumption of rally.                      
  03/06/1959,                                  3.00  Brought shallow decline to lower band and rally's resumption.                    
  05/29/1959,                                  3.50  Brought decline to lower band and resumption of rally.
                     wpe1C6.jpg (44335 bytes)   

   09/11/1959,                                 4.00  DJI fell to lower band after last rate increase.
  06/10/1960,                                 3.50  mkt fell back to and below lower band.
                                                                                             Decline continued until an October 1960 bottom.

                                              Discount Rate raised
                    wpe1C7.jpg (55579 bytes)
08/12/1960,                                 3.00    Mkt declined to lower band.
    Peak had been  in January 1960 at 690. Bottom was not until October 1960 at 570.
                    wpe1C8.jpg (42476 bytes)
                         Democrat was in White House.
                                         07/17/1963,                                3.50
                    wpe1C9.jpg (44293 bytes)
                                         11/24/1964,                                4.00
                    wpe1CA.jpg (44074 bytes)
    12/08/1965,                                4.50      3rd successive increase is bearish.
                                                Top in January 1966 at 990 and decline to 780 in October 1966.

                                                              Fed. Discount Rate
wpe1CB.jpg (57930 bytes)
  4/7/1967                                     4.00 Drop confirms recovery from October 1966 lows.
                                                                                            Bull market continues through September

  11/20/1967                                 4.50 Rallied to upper band and then 8% decline.
                                                                   Discount Rate Drop                                        Discount Rate Rise
4/7/2007                                                          11/20/2007
                     wpe1CC.jpg (46132 bytes)
3/22/1968                                   5.00    Rate Rise was right at bottom.
5.50    Rise in rates in on-going bull market

   8/30/1968                                  5.25    Sends market up until December
12/18/1968                                5.50    Marks top in bull market.
                                                             Market rallies until early December 1968.
                                                          Rate Rises                          Rate Drop                    Rate Rise
3/22/68     5/6/68                      8/30/1968                     12/18/1968
                    wpe1CE.jpg (41598 bytes)               
4/4/1969                                     6.00 
                                                   Discount RateRise
                   wpe1CD.jpg (49141 bytes)

  11/13/1970                                 5.75  Bull market is launched.
   12/4/1970                                    5.50  Bull market continues.
                   wpe1CF.jpg (47081 bytes)
1/8/1971                                     5.25%   Drop in rates in on-going bull market
1/22/1971                                   5.0%     Drop in rates in on-going bull market
2/19/1971                                   4.75%   Drop in rates in on-going bull market
   7/16/1971                                   5.0%    Starts market decline.
                                                                   DJI declines 15%.

11/19/1971                                 4.75%  Decline brought to a stop.
  12/17/1971                                 4.5%    Drop in rates in on-going bull market
                    wpe1D0.jpg (45873 bytes)

1/15/1973                                   5.0% Start of Big Trouble and bear Market.
                                         2/26/1973                                   5.5%
                                            5/4/1973                                  5.75%
                                         5/11/1973                                   6.0%
                                         6/11/1973                                   6.5%
                                         7/2/1973                                     7.0%
                                         8/14/1973                                   7.5%

This steady set of rate hikes was most  bearish!
                    wpe1D1.jpg (50128 bytes)

    4/25/1974                                   8.0%     Guarantees additional weakness!
7.75%   Ends bear market - tight at bottom.
                                                                                                                                              Rate Increase Drop
                    wpe1D2.jpg (48368 bytes)

  1/10/1975                                  7.25%
2/5/1975                                    6.75%   Drop in rates in on-going bull market
  3/10/1975                                  6.25%   Drop in rates in on-going bull market
  5/16/1975                                  6.00%   Drop in rates in on-going bull market

                   wpe1D3.jpg (43332 bytes)

1/19/1976                                  5.50%   Drop sets off excellent rally.
11/22/1976                                5.25%   Drop permits year-end rally.

                  wpe1D4.jpg (41296 bytes)
                                                              Democrat in Presidency
8/31/1977                                  5.75%   sends market lower.
                                          10/26/1977                                6.00%   bear market rally to upper band and then much lower.
                                           1/9/1978                                    6.50%+1.2%   sends bear market lower.
                                          5/11/1978                                  7.00% +1.2%  rate hike does not stop bullish recovery
                                                                                            but does bring decline to lower band.

                   wpe1D5.jpg (45688 bytes)

    7/3/1978                                   7.25%
                                            8/21/1978                                 7.75%
                                            9/22/1978                                  8.00%  3rd Rise in 3 months!  Warning!
                                           10/16/1978                               8.5%    Fed determined to drop the market.
                                           11/01/1978                               9.5%    Still raising rates despite market drop.

                  wpe1D6.jpg (48959 bytes)

     7/29/1979                                 10.0%
                                           8/17/1979                                 10.5%
                                            9/19/1979                                11.0% Fed determined to drop the market.
                                           10/8/1979                                 12.0%
                                           2/15/1980                                 13.0%  Fed determined to drop the market

12.0%   Market is rallying from April low.
11.0%   Drop in rates in on-going bull market

                  wpe1D7.jpg (51286 bytes)

10.0%   Drop in rates in on-going bull market
9/26/1980                               11.0% Tightening again.
                                          11/17/1980                             12.0%  Stops rally and drops DJI to lower band.
                                          12/5/1980                              13.0%  Drops DJI to lower band and support.

                 wpe1.jpg (47569 bytes)
5/5/1981                                    14.0%  Fed seemed determined to drop the market                  
11/2/1981                                  13.0%   Fed next decides to support market
                                          12/4/1981                                  12.0%   Fed supporting market for Christams rally.

wpe4.jpg (52341 bytes)
7/20/1982       3rd Rate Cut     11.5%   Bullish drop in Discount Rate after decline.
                                          8/2/1982                                     11.00% Market explodes upwards
                                          8/16/1982                                  10.5%
                                          8/27/1982                                  10.0%
                                          10/12/1982                                  9.5%   Drop in rates in on-going bull market
                                          11/22/1982                                  9.0%   Drop in rates in on-going bull market
                                          12/15/1982                                  8.5%   Drop in rates in on-going bull market

wpe5.jpg (49200 bytes)
4/9/1984                                      9.0% Rate hike leads to more of a decline.
11/21/1984                                  8.5%   Mkt declines to lower band. 
                                          12/24/1984                                  8.0%   Drop in rates in on-going bull market

wpe6.jpg (55731 bytes)
  5/24/1985                               7.5%    Drop in rates in on-going bull market
wpe7.jpg (46371 bytes)
3/7/1986                                     7.0%    Drop in rates in on-going bull market
                                          4/21/1986                                    6.5%   Drop in rates in on-going bull market
                                          7/11/1986                                    6.0%   Drop in rates in on-going bull market
                                           8/21/1986                                   5.5%   Drop in rates in on-going bull market

wpe8.jpg (51766 bytes)
9/4/1987                             6.0%  Mkt rallies to upper band and then
                                                                                                         Big October 1987 Crash!

Rate Hike
wpe9.jpg (53357 bytes)
8/9/1988                                     6.5%  Mkt declines to lower band, then up.

wpeB.jpg (56744 bytes)
2/24/1989                                   7.0%  Mkt declines to lower band, then up.

wpeC.jpg (42107 bytes)

                                                      20% Decline from July 1990 Peak.
    12/19/1990              6.50%  Helped turn market back up.  
Lowered Rate
wpeD.jpg (57689 bytes)
 Republican in White House.  Rate Cuts Are Aimed To Help Him Get Elected.
12/19/1990                                 6.50%  Helped turn market back up.  
                                           2/1/ 1991                                    6.0%  
                                          4/30/1991                                    5.5%   Drop in rates in on-going bull market
                                          9/13/1991                                    5.0%   Drop in rates in on-going bull market
                                          11/6/1991                                    4.5%   Drop in rates in on-going bull market
                                          12/20/1991                                  3.5%   Drop in rates in on-going bull market

wpeE.jpg (49025 bytes)
7/3/1992                                      3.0%    Drop in rates in on-going bull market 

Democrat in White House
  5/17/1994                                    3.5%  Market had already fallen.
                                         8/16/1994                                    4.0%
                                         11/15/1994                                  4.75%  3rd consecutive rate hike.
                                         2/1/1995                                       5.25% Could not stop powerful breakout.

1/31/1996                                       5.0%   Drop in rates in on-going bull market
                                                                                              This helped propel market higher.    
                                        10/15/1998                                     4.75% Drop in rates after 20% correction.
                                        11/17/1998                                    4.5%  Market moved higher.

8/24/1999                                     4.75%  
                                       11/16/1999                                    5.0%  
            (                          2/2/2000                                       5.25%  DJI falls more than 10%
                                       3/21/2000                                     5.5%
                                       5/16/2000                                     6.0%
Determined to drop the market.

Republican in White House
1/3/2001                                         5.75%
                                       1/4/2001                                         5.50%   
                                       1/31/2001                                       5.0%
                                       3/20/2001                                       4.5%
                                       4/18/2001                                       4.0%
                                       5/15/2001                                       3.50%
                                       6/27/2001                                       3.25%
                                       8/21/2001                                       3.0%
                                       9/17/2001                                       2.5%
                                       10/2/2001                                       2.0%
                                       11/6/2001                                       1.5%
                                       12/11/2001                                     1.25%
                                        11/6/2002                                        0.75%   Very low rates neeed to
                                                                                                            reverse bear market.

   January 2003 -- Change to "primary - secondary" discount rates.

   1/25/2003                        1.75% to 2.00%
    6/30/2004                                         2.25%
                                       8/10/2004                                          2.5%          3rd rise did not bring a decline.
                                       9/21/2004                                         2.75%
                                      11/10/2004                                        3.0%
                                      12/14/2004                                        3.25%

2/2/2005                                           3.5%
                                      3/22/2005                                         3.75%
                                      5/3/2005                                            4.0%
                                     6/30/2005                                          4.25%
                                     8/9/2005                                             4.5%
                                     9/20/2005                                           4.75%
                                     11/1/2005                                           5.0%
                                     12/13/2005                                         5.25%
                                     12/31/2005                                         5.5%

  3/28/2006                                           5.75%
                                     5/10/2006                                           6.0%
                                     6/29/2006                                           6.25%

8/17/2007                                          5.75%  Drop in rates in bull market
                                                                                                             usually brings market rally. 
                                     9/18/2007                                            5.25%
                                     11/1/2007                                            5.0%

                                     12/02/2007                                          4.75%  A briefer rally.
                                     1/22/2008                                           4.0%-3/4%  Stunning rally from 11,750 to 12,378 in two days       
wpe4B.jpg (58688 bytes)
                                                   (Source: http://minneapolisfed.org/research/data/us/disc.cfm )

Want more to read on the subject?                         

    wpe9.jpg (27871 bytes)               
   " The focal point of the book is the celebrated and controversial tenure of Federal Reserve Chairman P
    aul Volker (1979-1987), but the mechanics of central banking so clearly and concisely explained are just
    as much applicable today as in 1980 - or 1950 for that matter.

    Greider divides the book into three more-or-less equal thirds. The first covers the inflationary surge of the
    1970s, Carter's tenuous decision to appoint Volker, and Volker's radical move of abandoning the control of
    interest rates in favor of controlling the nation's money supply. (In other words, a shift from the Keynesian
    orthodoxy dominant in the post-War period in favor of a monetarist approach more in line with the theories
    of the iconoclastic economist Milton Friedman.) The second, and most informative third provides an
    historical overview of central banking and its development in the United States. For those solely interested
    in a better understanding of central banking and the US Federal Reserve in particular, this book will be
   worth your while even if you only read this middle section. The final third deals with Volker's punishing monetary
   policy during the early 1980s, as he attempted to destroy lingering anticipation of inflation and the incredibly
   simulative effects of the Reagan era federal deficits and tax cuts.

   Greider is highly critical of Volker's performance as Fed chairman. In short, he argues that far from being
   the independent and benevolent Shepard of the economy it often claims to be, the Fed, in practice, is in  
   effect waging war on the millions of ordinary Americans struggling to make end meets and keep their heads
   above water."
   (Source: http://www.amazon.com/gp/product/customer-reviews/0671675567#customerReviews )

,,,   Link to Fed Funds Rate History.       Definition.






























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