Base rate followed the market rate down in July 2003, but no sooner had it done so than the market signalled a reversal. The base rate followed 4 months later, November 2003, but not by enough to close the gap. After a three-month delay, it did so. The subsequent path delivered an upward signal as strong as those before the previous two base rate changes, and it was duly followed. Since, if anything, the 3-month rate responded by rising yet faster, another quarter-point increase in bank rate followed in one month. The subsequent slight sign of a pause in the 3-month rate was not maintained, and the rising signal was followed on 5th August. Since then, there there was at first no response by the 3-month rate. It seemed to be hovering around a "steady" signal. A sharp rise was soon reversed. From mid-April, however, a downward movement gathered momentum to the point where a quarter-point fall in the official rate rise was inevitable, or even overdue. It duly took place. The market then indicated a pause for a year, according to criteria used here. Although premature by those criteria, the base rate was increased by a quarter-point on 3 Aug. The reaction of the market over the next weeks was awaited. And although it is too early to tell, this was one of those rare occasions, in 11 years of observation of three banks, that the market responded to a bank decision in the conventionally related way, i.e., by immediately following it! By the normal criteria, the market rate then gave a strong signal of a virtually inevitable and indeed overdue base rate rise (and just possibly a half-point rise). The quarter-point base rate rise duly followed on 9th November. The preliminary market reaction since was non-committal, but the base rate was rashly raised another quarter-point on 11th Jan. It remained to be seen whether the UK market would treat this signal with the same indifference as the US market showed to the last Greenspan rise. But not so. The market rushed on, indicating the likelihood of a base-rate rise soon.

As from 11 Feb 2005, an approximate indication of the real (inflation adjusted) 3-month interest rate is given.

Press comment:

Financial Times 11th June 2004
"The Bank of England has spent seven months tip-toeing around the consumer but with yesterday's quarter point rise in the main interest rate the monetary policy committee has stamped its foot."

The bank rate rise was, as usual, covered in many, many column inches, touching all bases except the most boring and obvious one, the historical record of current and recent levels of actual interest rates.

After a period of stability lasting the best part of a year, the marked and accelerating rise of the 3-month rate beginning April 2004 made a bank rate increase virtually inevitable, and this duly took place. The signal remained upward. The Fed rate-rise to 1.5% on 10th August seemed premature (may have been done, according to one comentator, to justify previous Fed briefing)*. The pre-step-change rising trend of the 3-month rate (which began a month and a half before the Fed followed suit), was again acknowledged by a further step, the 3-month rate still rising, apparently unchecked. The signal to the Fed to make a further upward step was obeyed on 10th Nov (see letter to the FT below). The seven and a half month unbroken rise of the 3-month rate seems to be proceeding at the same fast pace, which if continued for only another week, would indicate a further quarter-point rise in Fed rate. Added 17 Dec 2004: The Fed took the hint on 14 Dec. The rise continued. On 2nd February it was answered by a quarter-point rise in the Fed rate, and again on 22nd March. On both occasions the rises were amply signalled here. The relentless rise continued and was answered by a Fed rate rise on 3rd May, and by another on 30th June. There is no sign of abatement, and no evidence that the Fed is leading this rise. A further quarter point rise was indicated, and has taken place. There was then some sign of a pause. On Tuesday 13th September, presumably reflecting official briefing, the Financial Times had the front page story beginning as quoted below with the confident prediction of a rate rise next week. The author, Andrew Balls, was evidently not one of my readers. Nor is Mr Greenspan, since the rise took place. A glance at my 10-year graph shows that this is almost unique. After a 4-week hesitation, the market resumed the trend rate with which it had led the Fed from April 2004 until two months ago. It did this so vigorously that it was as if the 4-week pause in the 3mth rate, beginning around 12 August had not happened. Remember that this pause began at virtually the moment when the Fed had decreed a quarter point rise. The rise was so strong and sustained that there was an unmistakeable signal for another Fed step-up, duly acted upon. The rise continued unabated, with another rate rise on 16th December. Note that with one exception, the 3-month rate shows no step structure, although according to the conventional story, it is supposed to be responding to the official rate. On the contrary, the 3-month rate appears to have decided well in advance, in mid-April 2004, to rise, and apart from the exception already mentioned, has risen ceaselessly ever since. A check shows that during this 20-month period there have been only 4 weekly values which have not been greater than or equal to the value of the preceding week, and these occurred in two widely separated instances involving two successive weeks. A slackening of the rate of rise may now be setting in. However, perhaps the Fed is reading this website. They seem to be determined to show that the market is not demonstrably leading them. They are taking a punt. Another quarter point has been added (31 Jan 2006), more or less keeping pace with, rather than lagging, the market. However, in the terms normal to this site, there is now a signal from the market at this time (24.3.2006) that a further rise is virtually certain. And (28.3.2006) it took place. The rise continues unabated. The UK Financial Times (19.4.2006) devoted 48 column-inches to Fed wording interpreted as signalling only one more upwards step. Well, it has to stop some time, and although there had been signs of a slackening of pace, the upwards trend continued, and a further quarter point rise seemed (23.6.2006) inevitable. This duly took place on 29.6.2006. Since then, the market rate rose only a little, and has now dipped markedly for the first time since April 2004! So the UK example is not being followed here. Media column-inches on the non-action or likely action of the Fed has been empty space-filling. There is no real signal for change, but the immediate trend seems to be down.

As from 11 Feb 2005, an approximate indication of the real (inflation adjusted) 3-month interest rate is given. It appears to have been negative for a couple of years.

* Or might it be a case of the old joke - I must get in front of this mob because I am their leader?

Press comment:

Financial Times 13th September 2005
"The US Federal Reserve is set to press ahead with its campaign of raising interest rates at its meeting next week, in spite of the economic impact of Hurricane Katrina. But there is expected to be intense discussion of whether substantial changes to the wording of the accompanying policy statement are needed."

Financial Times 11th June 2004
"Mr Greenspan seemed to state the obvious when he said the Fed would do "what is required" to curb US inflation. But allowing for the ambiguities of central banker-speak, was he perhaps giving a hint that the Fed planned a more aggressive-than-expected monetary tightening?"

This insight adds nothing to what could be seen here at that date.

Financial Times 28th June 2004
"Fed officials appear comfortable with the path of interest rates investors have priced in and pleased that financial markets have tightened financial conditions pre-emptively".

This appeared among the column-feet of vacuous, fact-free, comment in the FT in the days preceding the Fed bank-rate change. It is an ingenious way of asserting that the Fed leads, but from behind! With an audience like this, the assertion that the bank leads qualifies in Popperian terms as an unfalsifiable one, since in all cases, the central bank leads, either according to the visible evidence of lagging 3-month rates, or, if not, the "financial markets" are said to have followed the bank's lead "pre-emptively", i.e., in advance. Such an assertion, inherently incapable of being demonstrated or denied, is, in objective terms, pointless.

Financial Times 9th November 2004
"Sir, in your editorial “Onwards and upwards, for now” (November 6) you appear to endorse without reserve the Fed’s picture of Mr. Greenspan more or less single-handedly conducting the American economy with wise and deft touches to interest rates. You state that he has unexpectedly refrained from giving Mr. Bush “a helping hand by holding down interest rates”, as if he could personally have decided to keep the Fed funds rate at 1 percent for the last four months.

"The facts do not support this. The 3-month US$ Libor rate whose daily movements are tabulated daily in the FT, having remained fairly steady from mid-June 2003 till early April 2004, turned decisively upwards on that date, and it has risen more or less continually since, by 1.1 percentage points, from 1.11 percent to 2.21 percent.

"This decisive rise began 90 days before the Fed made its first quarter point rise at the end of June, and had progressed by half a percentage point by then. Since the Fed has so far responded by a three-quarter-point rise to the market signal of 1.1 points, clearly, as your editorial noted, “another quarter-point is expected next week”.

"It strains credulity that the Fed is dictating interest rates. The bare numerical evidence over the years suggests that it is not even a player, but maybe that is an over-simplification. Walter Stanners"

This letter, as far as is known, provoked no comment, positive or negative, during the following days.

Apparent tendency:
The downward tendency has halted. The last period since June 2003 has been by far the most stable in the period covered by the graph. After more than two years of signalling "no change", there was a sudden and sharp step-up in the 3mth rate, beginning late September. The signal was strong enough to dictate a one-quarter point rise in the base rate, and this took place. A look at the graph confirms that the pattern (a 2-month sustained signal)is normal. The unusual aspect is the unprecedentedly stable 2-year plateau from which this sudden rise took place. Although there was not a definite pointer to a further base rate change, there was a sustained trend upwards, beginning in late September 2005. A quarter-point base rate change took place on 2.3.2006 in response. The 3-month rate rise continued. A quarter point rate rise was predicted here, and occurred on 8.6.2006. A further steady rise took place. According to the criteria used here, the signal for a rise of base rate was still not compelling, but a quarter-point rise took place on 3 Aug. Nevertheless, in contrast to the UK situation, the EU central bank is very clearly following the market lead, and another quarter-point rise has duly taken place. The trend is still up, enough for a quarter-point (rather premature) base rate rise on 7th Dec.

As from 11 Feb 2005, an approximate indication of the real (inflation adjusted) 3-month interest rate is given.

Press comment:

Financial Times 13th January 2006
Under the headline, "Trichet signals rises in rates", the following appeared. "Jean Claude Trichet added: 'everyone knows that we act when necessary'. Financial markets, which expect a further quarter point rise in March, had 'pretty well captured' the ECB's message", he said.

This seems now to be the standard line, as was remarked above in connection with the US. It means that Trichet accepts the contention of this web-page that the central bank's base rate changes do not lead, but are led by, prior market changes. The ingenious defence is that these prior market changes are themselves led by the regular gnomic and carefully staged utterances or "messages" of the central bank chief. It is as if the man who says "it looks like rain" was to claim afterwards that he caused the subsequent rainfall.