Fed Chair Jerome Volcker
Friday May 12th, 2023 - Issue # 44
(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
Good morning and happy Friday!
For readers in the GTA, congrats on a warm and sunny week. The weather this year has not made this bear market any easier but it appears we’ve made it through.
Just like every week for the past few months, there’s a lot to talk about but I’ll try and keep it short.
Firstly, US inflation is now in the 4’s as the numbers came in on Wednesday at 4.9% vs the expected 5.1%. Inflation has cooled considerably since peaking at around 9% in June 2022. In my opinion (formed by many others) it’s almost a certainty that we get a pause in hikes at the next FOMC meeting in a month from now. The only way we would’ve seen another hike is if CPI came in way hotter than expected and we got the opposite.
I watched an interesting interview this week that highlighted the other side of Paul Volcker’s notorious battle with inflation…
Paul Volcker has a heroic reputation for keeping at it (hiking rates and keeping them high) until the job is done. Sound familiar? I mean, I’m sure at some business schools there are now drinking games for FOMC pressers — take a shot every time Powell says “we will keep at it until we are confident the job is done.” Powell has continuously glorified and has been compared by many to his late predecessor. He’d rather go down as a fearless Paul Volcker instead of a spineless Arthur Burns (Fed chair from 1970-1978 who is known for letting inflation get out of hand by not keeping rates high enough, long enough).
The chart below tells a side of the story that I don’t hear anyone talking about.
The chart above shows when Volcker came in (1979) after Burns and drove up rates to nearly 20% to snuff out inflation that ran super hot in the 70s. As expected, this threw the economy into a recession.
During the first Volcker recession in 1980, the Fed quickly slashed the fed funds by more than 1000 basis points (or 10%) — rates averaged 18.8% from March 26 to April 20 in 1980 but fell 8.6% by early June. In 1981, when President Reagan took office, the Fed funds rate was jacked back up to 19.1%, which sent the economy into a deep recession that lasted from July 1981 to November 1982. However, by February 1983, the Fed had slashed rates from its peak of 19.1% to 8.5% — another 10% rate cut. This was the second 10-point rate cut from Volcker, the hero who is now celebrated for his firm stance on not lowering rates when the economy implodes.
On a relative basis, Powell has already gone further than Volcker and he went a hell of a lot faster. If he’s following the playbook of Volcker — the biggest rate cutter in history — why should we expect anything different?
The Denominator - Arthur Hayes