Stock manias are not a zero interest rate phenomenon

“We hope the Federal Reserve is taking note of the gambling that’s being done with the zero-interest money it’s pumping out,” wrote the Washington Post’s Editorial Board in late January 2021, chiding the US central bank for its supposed role in fueling the meme stock moment.

“It is hard to imagine anything like GameStop if the Fed hadn’t cut rates to zero, promised to keep them there, and pumped more money into the system,” wrote John Authers, a columnist at Bloomberg Opinion, a month later.

Well, it’s easy if you try.

Now that [gestures wildly at the stock charts of GME and AMC] is happening again and the Federal Reserve’s policy rate is above 5%, can we scrap the notion that there’s some kind of mechanical relationship between the interest rate that banks charge one another on overnight loans and the sliding scale of sane-to-crazy things Americans are willing to invest in?

To quote Mark Dow, founder of Dow Global Advisors (and one of the best all-round thinkers on financial markets, for my money), “The relationship between policy rate levels and risk appetite formation is neither predictable nor stable.”

And to be clear, this isn’t something we needed to wait until now to adjudicate. This is just another reminder. The late 90s happened! Pets dot com and so on. This case was closed before it was even open. 

Dow, again:

Now, there’s a completely separate question of whether this episode says anything about if the stance of US monetary policy is doing enough to put downward pressure on inflation. I’m all for having that debate — at least it’s a debate we haven’t had the answer for more than two decades.