The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 40

The Interest-Rate Shuffle

This chart, covering 25 years of short- and long-term interest rates, crossed my desk in 1974, the year of the worst post-war recession in the United States by far. From the chart come several simple lessons. First, short- and long-term interest rates usually move the same way at about the same time. Look at 1953 or 1957 to see that they peaked virtually simultaneously. In 1970, short-rates peaked before long-rates, but only by a few months. In this case, short-rates were a warning to investors of the likely road ahead for long rates (see Chart 42). But what about 1973? Short-term rates peaked, then fell, rose again, and rates were still climbing in late 1974.

Nothing's perfect, but this chart's imperfection demonstrates another imperfect rule. When rates fall steeply for months, the economy tends to be very weak. The shaded areas represent recessionary periods as measured by the National Bureau of Economic Research (NBER), the official recession record keeper for the United States. With the exception of 1966, every time interest rates took a nosedive, the economy was just starting a recession.

In late 1974, facing an economic cliff, Gerald Ford & Co. were arguing for tight money to help “Whip Inflation Now”—remember the W.I.N. buttons? Ford was also arguing us further down an already faltering economic cycle. He could have heeded a clear warning by seeing short-term rates flashing their tell-tale “peak” in 1973, but he didn't. So, 1974 could ...