Gradually Worse

We Need Volcker-Plus

Biting the Bullet

Anguish All Around: Against Gradualism

Family and Home Again

This time last year, the great debate was whether inflation would be “transitory.” That question is now settled (Narrator: “It wasn’t transitory at all.”), we have moved on to debating what the Federal Reserve will do about it… and can do about it.

The experts at the Strategic Investment Conference fell into two camps: The Fed will move either a) too fast and spark a deep recession, or b) too slow and let inflation get much worse. (There’s a theoretical chance the Fed finds a perfect path in between, but I don’t know anyone who seriously expects it.) That means we are heading somewhere unpleasant; the only question is what kind of unpleasantry we’ll get.

My own opinion—admittedly in hindsight—is that inflation was already out of control before the debate even started. The Fed should have resumed “normal” policy in late 2020 or early in 2021 as vaccines eased COVID effects. They could have gone 25 points a meeting and backed off $10 billion of QE and normalized which would have given them some options. They didn’t and now have no options but to lean into inflation. Jerome Powell’s team kept emergency measures in place long after the emergency (at least the economic part of it) ended.

Powell knows recession is preferable to inflation (I’ll show why I believe this is true below), so I think he’s determined to err on the hawkish side—meaning a recession is coming soon. I’ve also wondered whether negative market reaction would sway him, as it did in 2018. Last week may have been a clue. An unexpectedly strong Consumer Price Index generated a major sell-off in stocks and crypto assets. Why? Investors seem to fear the Fed won’t do enough to rein in inflation. Then at this week’s FOMC meeting they decided to hike 75 basis points instead of the previously expected 50.

So, this was a twist. Powell gave the market what it wanted, but this time the market wanted tighter policy, not looser as it did in 2018. We’ll never know whether he would have bucked Wall Street because (for once) Wall Street demanded the right thing. He telegraphed the 75 basis point hike by a leak to Wall Street Journal reporter Nick Timiraos, who has evidently replaced John Hilsenrath as the new “Fed whisperer.”

While a few major banks called for the 75-basis-point hike the prior week, all the majors piled on following that report. The market priced in the full 75-basis-point hike almost immediately, giving Powell permission to do what he wanted to do anyway.

Unfortunately, I think everyone is too late. I believe significant inflation is probably locked in for the next year at least. It will come in waves of varying intensity, as happened in the 1970s, but the overall trend is set.

Today we’ll look at some evidence this period could even be worse than the 1970s. Then we’ll read the mea culpa regrets of someone who had a big part in that drama.