The risks linked to persistent inflation are still far greater than the risk of triggering a recession.
Marc Higgins
author of “Investing in U.S. Financial History: Understanding the Past to Predict the Future.”
“The risks of persistent inflation still far outweigh the risk of triggering a recession,” Mark Higgins, senior vice president of Index Fund Advisors and author of “Investing in US Financial History: Understanding the Past to Forecast the Future. CNBC.
“(The Fed’s) failure to do this in the late 1960s was one of the major factors that allowed inflation to take root in the 1970s,” Higgins said.
This time around, the central bank should remain extremely cautious, Higgins said, even if that means keeping rates higher for longer.
“My instinct is that they are aware of the risks and they will not subside too soon,” he added.
The Fed’s “two major mistakes”
“The Fed has made two major mistakes in its history,” according to Higgins, and these two missteps still influence the central bank’s decisions today.
“The first (mistake) was allowing the banking system to collapse in the early 1930s, which caused the Great Depression to significantly worsen,” he said. “The second was the Great Inflation of the 1970s, when inflationary pressures built and the Fed tightened interest rates but pulled back prematurely, which is the risk the Fed faces today. “
Although financial regulation and the creation of deposit insurance could prevent a full-blown banking crisis from occurring today, “the real danger here is that the Fed will ease prematurely, which is exactly what it did at the late 1960s,” Higgins said.
“Deep down, Powell is petrified of making Volcker again,” Neuberger Berman senior portfolio manager Steven Eisman said recently on CNBC’s “Squawk Box.”
The Fed has “engineered what appears to be a soft landing, inflation is falling, the economy is still strong, why would you waste rate cuts now and risk a resurgence in inflation when in reality all you have to do is claim victory? he said.
Even in prepared remarks last month, Powell referenced Volcker’s past interest rate policy as the reason policymakers don’t want to ease policy too quickly now.
“Reducing policy stringency too soon or too much could result in a reversal of the progress we have seen on inflation and ultimately require even tighter policy to bring inflation back to 2%,” Powell said.
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