Whatever it breaks
BY 1980, CENTRAL BANKERS WERE PREPARED TO DO ‘WHATEVER IT TAKES’ TO DEFEAT INFLATION. TODAY, THEY FACE THAT ENEMY ONCE AGAIN. Investors expect inflation to drop sharply in 2023 and the monetary cavalry to arrive by the second half of the year. But might those hopes be misguided? Without a sharp deterioration in labour markets or severe market distress, central bankers may just keep conditions tighter, and for longer, than investors expect. When the monetary cavalry eventually does come, it might be too late to save Wall Street. Will central banks choose to quash inflation, whatever it breaks?
“Everybody likes to get rid of inflation but when one comes up to actions that might actually do something about inflation, implicitly or explicitly, one says: ‘Well, inflation isn’t that bad compared to the alternatives.’”
KEEPING AT IT
The now lionised Paul Volcker took the reins at the Federal Reserve (Fed) in August 1979. In the ten preceding years, US inflation had averaged 6.4%, with a peak of 11.6% in October 1974.2
But high and entrenched inflation was only one facet of the 1970s economic malaise. Joblessness, on a scale unseen since before World War II, became the norm. The unemployment rate averaged 6% over the decade, reaching a generational high of 9% in 1975.3
By the time President Carter nominated Volcker to lead the Fed, the US was reeling from a decade of economic pain and growing political division, intensified by the Watergate scandal and President Nixon’s eventual resignation. The sustained post-war boom in living standards was a distant memory.
1 Transcript from the February 1981 FOMC meeting 2 US Bureau of Economic Analysis, personal consumption expenditure (PCE) deflator. The actions of Powell’s Fed will do more than anything else to shape the investment environment of the next few years. 3 US Bureau of Labor Statistics