The Fed Should Follow Volcker’s Playbook and Act Boldly This Week

It’s going to be an interesting week for the markets and the economy. It’s the first week in May, and often we see investors follow the saying, “Sell in May and go away.” That actually may work this year with the market clearly in bear territory. But is there more pain in store for the bulls or will a rabbit appear from Federal Reserve Chairman Jerome Powell’s hat?

The Fed may embark on a very bold move to raise interest rates, and if it is not messing around it will go outside the box and take a page from former Fed Chairman Paul Volcker’s playbook from the 1970s.

What does that mean? Well, with elevated inflation back then we saw fed funds rate rise to 22% from 6.5% just two years before. Volcker did not flinch and took massive criticism. But in the end, what did higher rates accomplish?

It snuffed out out-of-control inflation, caused twin recessions as the bond market moved forward while the stock market suffered greatly. But the bond market rallied, and a 42-year bull market ensued.

Why is that? Simply put, the bond market felt the urgency of Volcker to snuff out inflation for good. He made the radical move, but let’s be honest — since 1982 we have not seen high inflation, until now.

Is the Fed even thinking about a big move this week, or even beyond? It’s hard to say for sure, but we’ll find out on Wednesday if it has the same ice water in its veins. Can the Fed forget the stock market for a time and focus on stabilizing prices, which is one of its mandates from Congress? Enough with the verbal threats and jawboning. Action is needed or there will be much bigger problems to deal with.

What would be a bold step? Maybe raising rates 100 basis points this week and signaling more big hikes are coming down the pike. The market is expecting only 50 basis points this week. That would shock the markets and the consumer, which is the sort of thing needed to slow down consumers. Price increases last week showed big rises and are unsustainable for this economy, and unacceptable.