Your choice . . . do you slowly peel-off a band-aid or do you prefer to simply rip it off?
Economists have long believed the only certain tool to end inflation is a recession. Paul Volcker proved it! He was Chairman of the Federal Reserve from 1979 to 1987 and ushered in two recessions, by raising interest rates from 11.2% to 20% during 1980 and 1981 – driving up unemployment to a whopping 10% but crushing inflation from 14.8% to only 3.0%.
However, Volcker never promised us a recession.
Last Friday, the Dow lost 1,008 points when the current Fed Head, Jerome Powell, promised “there will be pain.” Sounds like a promise to me?
Ugly as it is, this is good news. I was concerned that the Fed’s half-hearted attempt to deal with inflation would simply prolong the misery and was pleased to see them raising interest rates by 75 basis points each time so far this year. I was afraid they would only increase rates by 25% basis points each time. It is almost certain they will raise rates another 75 bps next month. That’s ripping it off, and that’s a good thing.
One major difference between the economic times of Volcker and Powell is the strength of our strong job-market today. We still have over a million job-openings and only 3.5% unemployed. That means we can afford to lose a great many jobs, if necessary to curb inflation . . . maybe enough to avoid a recession?