The finance community’s anticipation of the Fed’s Jackson Hole meeting has been equivalent to the Rolling Stones coming to town for baby-boomer music lovers, and for good reason. Inflation has affected not only bankers but bakers alike. And while we would love to say the only prescription is more cowbell, the true medicine is tough love.
The current state of inflation is eerily reminiscent to that of the 1970’s (see the charts below).
As such, it behooves policy makers to review history and apply lessons learned, and it appears the Fed has taken this to heart. Jerome Powell’s recent comments echoed an understanding that 1970’s inflation wasn’t just monetary or fiscal, but also psychological. He stated,
“…the public’s expectations about future inflation can play an important role in setting the path of inflation over time.”
Likewise, Former Chairman Arthur Burns stated,1
“Labor leaders and workers now tend to reason that in order to achieve a gain in real income, they must bargain for wage increases that allow for advances in the price level…”
Both chairmen state the same concept. Perception becomes reality. If people are expecting inflation to be high, they use that information in their decisions. The employee who loves their job will go to the boss and say I want to work, but you’ve got to keep my pay up with inflation. Likewise, the employer will understand the employee’s predicament and opt to give them a raise versus hiring an untested worker at a similar wage being asked originally.
This transaction puts more nominal dollars into the pocket of the employee and requires the employer to raise prices. If you’re thinking this won’t happen, guess again. It already has. The Wall Street Journal ran an article on June 9th titled Why Now Is a Good Time to Ask for a Raise in which the author cited high inflation.
So, what is the solution? It is exactly what Paul Volcker did when he took the helm. Convince everyone that it doesn’t matter what it takes, inflation WILL get under control. This tough love stance started with what became known as “Volcker’s Saturday Night Special”. Opposite of what the name implied, it kicked off one of the most volatile times in Fed Funds history. What was the result? Employees were no longer asking for a raise; they were just grateful to have a job. Ask anyone who lived through the early 80’s, and they will tell you the same thing. Hair styles were bad and the economy was worse!
And this is the light at the end of the tunnel. The Federal Reserve appears to have learned the lessons of the 1970’s as they draw upon similarities and “act with resolve”2 with restrictive monetary policy. Ben Franklin and my grandmother were right. An ounce of prevention is worth a pound of cure. While the Fed may not have recognized high inflation at the onset, being willing to act with resolve now is the next best thing for bankers and bakers alike.
-Brando Reyna, CFA
Brando serves as a Portfolio Manager for Novare Capital. Prior to joining Novare in 2017, he worked in varying capacities managing assets for mutual funds, government entities and high net worth families. He has close to 20 years of experience in the investment industry with expertise spanning portfolio construction, security selection, manager due diligence, asset allocation and alternative assets. He was awarded the Chartered Financial Analyst (CFA®) designation in 2011.
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