The Fed is Fighting the Foreboding Spirit of 1937

Wall Street strategists, in fact, are worried that the U.S. central bank is so cautious over not making the mistakes of a long-ago ancestor that it may miss a solid opportunity to normalize monetary policy after seven years of decidedly abnormal times.

“Many policymakers and market observers assert that the risk of the Fed raising rates too early exceeds that of moving too late. This is the specter of 1937, when the Fed raised rates prematurely and exacerbated the Great Depression,” Michael Arone, managing director and chief investment strategist at State Street Global Advisors, said in an analysis for clients titled “Why the Federal Reserve Needs to Bury the Ghost of 1937.”

“Most investors assume the prevailing lower-for-longer consensus is bullish for both equities and bonds,” he added. However, Arone said his “view is that a tardy Fed has a good chance of proving bearish for bonds and, longer term, for equities as well.”