Henry Kaufman is one of the rare Wall Street veterans who can authoritatively draw parallels between the inflation scare of the 1970s and today’s alarming run-up in prices. And he has zero confidence Chair Jerome Powell’s Federal Reserve is ready for the battle it now faces.
Kaufman decades ago was the celebrated chief economist at Salomon Brothers nicknamed “Dr. Doom.” He correctly anticipated the era’s crippling inflation and approved when then-Fed Chairman Paul Volcker delivered the so-called Saturday Night Special, a radical -- and unexpected -- tightening of monetary policy on an October weekend in 1979.
To Kaufman, Powell is no Volcker. Not even close.
“I don’t think this Federal Reserve and this leadership has the stamina to act decisively. They’ll act incrementally,” Kaufman, 94, said in a phone interview. “In order to turn the market around to a more non-inflationary attitude, you have to shock the market. You can’t raise interest rates bit-by-bit.”
Powell this week told lawmakers in congressional testimony that there’s a “long road” toward getting Fed policy to a “normal” setting -- suggesting more aggressive action isn’t needed to pull down inflation. Powell said the planned withdrawal of stimulus “should not have negative effects on the employment rate” -- a big contrast with the Volcker-era tightening that contributed to a surge in joblessness.
A more serious pledge to tame inflation would require the Fed going much further, Kaufman said. Volcker’s 1979 decision to restrict the supply of money drove short-term rates to excruciating levels but, eventually, also crushed inflation. Prices, rising at an annual 14.8% in March 1980, were ticking up at just 2.5% a year by July 1983. Volcker emerged a hero.
“It requited a lot of fortitude in 1979 to do what the Fed did,” Kaufman said.
Now, inflation is again roaring back. From an average of 1.7% in the 10 years through 2020 -- below the Fed’s 2% objective -- it jumped to a four-decade high of 7% last month.
If he were advising Powell, Kaufman said he’d urge the Fed chair to be “draconian,” starting with an immediate 50-basis point increase in short-term rates and explicitly signaling more to come. Plus, the central bank would have to commit in writing to doing whatever is necessary to stop prices from spiraling higher.
Out-of-Consensus
That’s a stark contrast with market and economist expectations for the Fed to wait until March to start boosting its key rate, and then only by a quarter point.