By C.W. Smith | July 10, 2012
Yahoo! Finance recently republished Alan Hall’s article from the June issue of The Socionomist, “Social Mood is the Real Governor of the Federal Reserve.” It tells a surprising story very few people have heard.
For over two decades, EWI has observed a correlation between interest rates set by the market and those set by the U.S. Federal Reserve. As Hall’s article says,
The link we identified—that the market leads and the Fed follows, not the reverse—continues to hold.
And today there’s new evidence that helps explain the “why” behind this correlation—namely social mood’s influence on the Fed. Hall dug through transcripts from the Federal Reserve’s meetings and discovered that during periods of positive social mood, laughter and the Fed went hand-in-hand.
Consider this exchange and comment from Hall’s article:
MR. HOSKINS: You’re probably all waiting for my stainless steel strip index, but I’m not going to give it to you because I’ve latched onto a new one: the Smuckers Index! I had a chance to talk with Paul Smucker, an elderly gentleman who has been through many business cycles and he told me that apple butter sales remain relatively soft and that’s a good sign because during deep recessions apple butter sales soar. [Laughter] So, I’ll be reporting to you on apple butter.
CHAIRMAN GREENSPAN: It sounds to me as though business is in a jam! [Laughter/ hoots]
The Fed’s mirth trended higher for the next 15 years as social mood shot toward a historic positive extreme.
Positive social mood kept the Federal Reserve laughing all the way into the 2000s and the extreme price trend of the real-estate bubble. But…
Approaching the peak of the housing bubble, the Fed was in an especially jovial and confident mood, unaware that a huge stock-market crash lay just ahead.”
“Socionomics not only explains why the Fed was so jolly at these peak [laughter] times but also has great practical utility in using such observations in real time to predict a change of social trend.
Most people don’t know that the Fed follows the market, so they don’t even ask why. We offer the complete explanation.