Fed hikes rates by 0.75 percentage points

To understand what the Fed is thinking, it is helpful to dig into the thinking of Fed Chairman Jay Powell.

During his tenure as central banker, he has made no secret of his admiration for Paul Volcker, whose name is practically synonymous with fighting inflation at all costs, even if it sends the economy into recession, like Volcker’s Fed — Twice – in the early 1980s.

Powell, known for his bluntness in a speech at Jackson Hole last month, seemed to fully embody his predecessor, declaring that “we have to keep going until the job is done” — (“it” is a rate hike, and “job” is Curb inflation.) Whether he meant it or not, this is a clear reference to the ideology of Volcker, whose 2018 autobiography is titled “Hold On.”

In congressional testimony in the spring, Powell said of his hero: “I think he was one of the greatest civil servants of his era — the greatest economic civil servant of his era.”

Volcker is so favored in part because it requires a shrewd mind and a stomach of steel to deal with rampant inflation and then implement the painful shock therapy of a rate hike that has cost millions of people their jobs. Volcker’s plan worked, but it wasn’t easy.does have some pain In modern Fed parlance.

Powell faced a similar conundrum. Inflation is the highest since Volcker took over the Fed, and the central bank itself is facing a credibility crisis after it didn’t act fast enough to rein in rising prices.

Credibility is also a big issue for Volcker.

“Volcker’s mantra, he told me time and time again in 2008-9, that in a crisis the only asset you have is your credibility,” Austin GoolsbyThe economist who advised the Obama administration wrote in 2019 following Volcker’s death at 92.

If Powell continues to borrow Volcker’s lead, it’s safe to assume his hawkish leadership will remain in place until inflation falls to the Fed’s 2% target.

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