It’s going to be an interesting week for the markets and the economy as we wait to see how far the Fed will take interest rates on Wednesday.
If they are feeling very bold, they may go outside the box and take a page from former Chairman Paul Volcker’s playbook from the 1970’s. In order to tame inflation back then, the Fed raised their Fed Fund rate from 6.5% to 22% over a two year period. Volcker did not flinch, and he suffered massive criticism at the time. But in the end, what did higher rates accomplish?
It snuffed out high inflation, caused twin recessions, allowed the bond market to surge forward, and hurt the stock market. It was very painful at the time, but it lead to 42 year bull market. Since 1982, we have not seen high inflation – until now.
How far will the Fed take interest rates?
We don’t know what the Fed might be thinking, but we’ll find out soon enough if they have the same ice water in their veins. Can they forget the stock market for a time and focus on stabilizing prices, which is one of their mandates from Congress? Enough with the verbal threats and jaw-boning, action is needed or we could have much bigger problems ahead.
It would a bold step to raise rates 100bps this week and signal more big hikes coming. The market is expecting only 50bps this week, so anything higher will shock the markets and the consumer. However, that is just what we need – something needs to slow down consumer spending. The outsize price increases that were reported last week are unsustainable (and unacceptable) for any economy.
This might be the selling excuse many traders and investors need. After all, it is the first week in May when many follow the anecdote, “Sell in May and go away.” The market is clearly in bear territory. What does it hurt to sit on the sidelines?