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Don’t panic: it’s October

At the conclusion of the mid-September meeting of the Federal Open Market Committee (FOMC), the Federal Reserve announced its decision to leave its target interest rate unchanged through the end of this month. Although some pundits had predicted that the Fed might use the occasion of August’s decline in the unemployment rate (to 5.1% from 5.3% in July), to begin its long-awaited monetary policy tightening, those forecasts left out one crucial fact.

It’s October.

And although October is when Chinese, Germans, Greeks, Kazakhs, Nigerians, and Spaniards celebrate their national days, Canadians commemorate Thanksgiving, and Americans celebrate Columbus Day, for anyone with a sense of financial history, October is a month to be feared. Because October is when financial crises erupt.

During the 19th and early 20th century, American and European financial crises typically took place in the autumn, mostly in October. It is not difficult to explain this seasonal pattern. In the northern hemisphere, crops are harvested in the fall and shipped from agricultural areas where they are produced to more urban areas where most are consumed. The money to pay for these shipments flows in the opposite direction. During the 19th and early 20th centuries, this outflow of funds from financial centers to more rural areas led to a sharp increase in interest rates during the autumn months. This financial strain often ended in financial crisis. Figure 1 shows this seasonal pattern during the quarter of a century before the Federal Reserve.

Figure 1, by Richard S. Grossman. Used with permission.
Figure 1 by Richard S. Grossman. Used with permission.

Beginning with its establishment in 1914, the Federal Reserve began to smooth out this seasonality and, as can be seen in Figure 2, the autumnal increase in interest rates practically disappeared.

Figure 2, by Richard S. Grossman. Used with permission.
Figure 2 by Richard S. Grossman. Used with permission.

Despite the decline in the seasonality of interest rates, U.S. financial crises have remained very much an autumn event. The most famous financial crisis of all, the 1929 stock market crash on the eve of the Great Depression erupted on 24 October. The 1987 U.S. stock market crash, failure of Lehman Brothers, and the European sovereign debt crisis all emerged in September or October.

There is no consensus view among economists as to why financial crises still cluster in the autumn. The post-1914 financial crises discussed above had a variety of different causes, many of which developed over months—if not years. There was no obvious common trigger for these events.

Let me suggest one: politics—or, more accurately—politicians.

Like swallows returning to Capistrano or salmon to their spawning grounds, politicians flock back to the capital after summer recess and start doing—or threatening to do–things that shake the market. Such governmental actions have been suggested as possible triggers for the 1987 stock market crash and the European sovereign debt crisis.

Could politicians trigger another October crisis? Yes.

A number of Congressional Republicans spent much of September threatening to shut down the U.S. government if Planned Parenthood was not de-funded. Senator Ted Cruz led the charge on this issue, but was joined by fellow GOP presidential contenders Ben Carson, Carly Fiorina, and Chris Christie. At the time of this writing (mid-September), it is not clear if a shut-down will take place, but the possibility is more than idle speculation. And if it occurs, the consequences will be severe.

FOMC members will have another opportunity to raise interest rates when they meet again at the end of October, but perhaps they will hold off until their December meeting. After all, if you are going to rock the boat, make sure you don’t do it in October.

Featured image credit: Stock exchange trading floor by skeeze. Public domain via Pixabay.

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