Bulletin
Investor Alert

New York Markets Close in:

In One Chart Archives | Email alerts

May 18, 2022, 4:58 p.m. EDT

Here’s what a modern Volcker-style inflation fight could look like, SocGen says

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    Dow Jones Industrial Average (DJIA)
  • X
    S&P 500 Index (SPX)
  • X
    NASDAQ Composite Index (COMP)

or Cancel Already have a watchlist? Log In

By Joy Wiltermuth

Federal Reserve Chairman Jerome Powell has begun talking about a “softish landing” for the economy as the central bank squares off against high inflation by raising rates and cutting its nearly $9 trillion balance sheet.

But what if Powell instead retraces the policy steps of former Fed Chair Paul Volcker from 40 years ago in a quest to stamp out inflation, for good, even at the cost of an economic recession?

That’s a scenario that Societe Generale’s global quantitative research team studied in a client note Tuesday, now that an “inflation-fighting impulse” is in the air. The team, led by the French bank’s head of North American quant research Solomon Tadesse, concluded that it could take another 9.25% (see chart) of monetary-policy tightening to stamp out inflation, should the Fed adopt a sole focus on containing inflation.

“Given that rates have already been tightened by 2.5%, another 9.25% of monetary tightening might be expected via policy rate hikes and an aggressive QT program,” the team wrote.

Specifically, that could mean a policy rate increase of 4.5% overall, plus a roughly $3.9 trillion reduction of its balance sheet , known as quantitative tightening, or “roughly equivalent to the net growth of the Fed’s balance sheet during the pandemic.”

On the flip side, if the Fed goes after a “growth-conscious tightening” cycle, one that aims to avoid a hard landing, the team sees little room left to tighten. In that scenario, policy is seen as peaking after 3% additional tightening, broken down into $1.8 trillion in balance-sheet reduction and only a further 25 to 50 basis points of rate hikes.

Stocks plunged Wednesday, with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.41% tumbling nearly 1,200 point s. That added to a sharp fall this year for equities as the Fed has looked to cool inflation near levels last seen in the early 1980s. The S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.31% was down 17.7% in 2022 through Wednesday, while the Dow was 13.3% lower and the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.23% was down 27% for the same stretch.

“Should supply-chain bottlenecks ease over time, the degree of monetary tightening needed to contain inflation through demand destruction could turn out to be lower,” the Societe Generale team wrote.

/zigman2/quotes/210598065/realtime
US : Dow Jones Global
30,839.81
-128.01 -0.41%
Volume: 116.28M
July 6, 2022 12:23p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,819.62
-11.77 -0.31%
Volume: 884.12M
July 6, 2022 12:23p
loading...
/zigman2/quotes/210598365/realtime
US : Nasdaq
11,296.65
-25.58 -0.23%
Volume: 2.06M
July 6, 2022 12:23p
loading...

This Story has 0 Comments
Be the first to comment
More News In
Markets

Story Conversation

Commenting FAQs »

Partner Center

World News from MarketWatch

Link to MarketWatch's Slice.