Volcker hiked 200 bps on a Saturday night
Jamie Dimon, chief executive of JPMorgan, said on Friday on the bank’s fourth-quarter earnings call that he sees a “pretty good chance” there will be more than four rate hikes, with the possibility of six or seven.
“I mean, I grew up in the world where Paul Volcker raised up interest rates, 200 basis points, on a Saturday night. And this whole notion that somehow it’s going to be sweet and gentle and no one’s ever gonna be surprised, I think is a mistake”
— Jamie Dimon, chief executive of JPMorgan
Jamie Dimon’s comments were in reference to the dramatic change in the conduct of monetary policy that occurred in 1979. During his confirmation hearing in July 1979 before the Senate Banking Committee, Paul Volcker made his intentions clear. He pledged to make fighting inflation his top priority as inflation was running at an annual pace of about 9 percent. As a result of new policy and restrictive targets set for the money supply, the federal funds rate reached a record high of 20 percent in late 1980. Inflation peaked at 11.6 percent in March of the same year.
While there are major differences to the Volcker era, it is worth noting that there are some similarities as to how the reaction function of the FOMC has changed. Chairman Powell has noted that he now sees controlling inflation as the path to full employment. He said in a testimony during his Senate confirmation hearing that he thinks inflation poses a sever threat to the economic recovery. This is a a decided change from the view before the December FOMC. It would appear the Fed is looking to restore its credibility in the battle against inflation as well. A hawkish global monetary pivot is underway.
Since the release of the December FOMC minutes markets have significantly raised expectations for earlier monetary policy normalization. Furthermore, the Fed is likely to start shrinking the balance sheet in a form of quantitative tightening (QT) much closer to the first rate hike than the market had anticipated. Importantly, it is not just the Fed, but central banks around the world are making clear their intentions to combat the recent run of upside surprises for inflation. As of today, pricing implies that the first hike is in March 2022. Various policymakers have now signaled support for it at the March 15-16 FOMC meeting.
Figure 1. Target rate probabilities for March 2022 FOMC meeting
Target Rate (in bps)
As of 14 January 2022. Source: CME, AIM Capital estimates.
Meanwhile, global growth remains above-trend and the economic impact from Omicron variant seems less than anticipated. Consumer demand is underpinned by strong labour market and wages. Business investment is robust, and supply chain issues show some signs of healing. Having said that, we believe that the shift in monetary policy and inflationary regime is likely to have profound implications which may not be “sweet and gentle” for markets.
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