History Doesn't Repeat, But It Does Rhyme

Over the past few years, the United States has been living through a period of high inflation and rising interest rates. Inflation peaked in June of 2022 at 9.1% and currently resides at 4.0% YOY as of May 2023. In order to combat the record high inflation, the Federal Bank has aggressively increased the Federal Funds Rate since March of 2022. After ten consecutive rate hikes the Federal Funds Rate now stands at 5.08%.

Even with the drastic 5.1% decline in inflation though, the Fed shows no signs of bringing down rates in the near future. Instead, Jerome Powell is attempting to learn from the mistakes of former Fed Chairman Paul Volcker by not reducing the federal funds rate too prematurely.

From 1964 to the late 1980s, a period better known as the Great Inflation, the United States was crippled with double-digit inflation. The causes of the inflation were, in part, attributable to the Vietnam War, Lyndon B. Johnson's Greater Society movement, and the USD detachment from the gold standard. In 1979, Paul Volcker took over as Chairman of the Federal Reserve with an agenda to crush inflation and cool off the economy.

Inevitably Volcker successfully curbed the crushing inflation, but it came at the discomfort of many Americans across the country. The United States was plunged into two recessions once from January to July 1980 and again from July 1981 to November 1982. Additionally, Americans also succumbed to double-digit unemployment which ultimately peaked at 11%. Paul Volcker's fluctuations of the Federal Funds Rate were far too volatile. Between 1980 and 1982 the interest rates peaked at about 20% then fell to around 9% only to rise back up to 20% a few months later. Instead we believe a more conservative approach of gradual increases held for longer durations would have been more effective in cooling the economy and easing the pain felt by the American public.

Even though the causes of inflation differ, the lessons Jerome Powell has taken from Paul Volcker are invaluable. From the start, Jerome Powell has been transparent about his goal to stamp out inflation while also doing his best to avoid a recession.

The FOMC has been consistent with its incremental rate hikes over the past few years and has expressed its timeline quite clearly. They have shown no signs of reducing rates in the near future until inflation returns to the agreed-upon 2% YOY standard. Given the history, Jerome Powell's slow and steady approach to combating inflation is perhaps the best way forward.

By Paul Gray,

Chief Executive Officer of Ironhold Capital

NY Regional Director of Hedge Fund Association