Can Fed Chair Jerome Powell prevent a repeat of high inflation of the ’70s era?

Have you mentally recovered from Tuesday’s market drop yet? Cathie Wood has — going on her largest buying spree since February. Retail investors also snapped up $2B in stocks on Tuesday.

Markets rebounded slightly yesterday, and now, investors are bracing for next Wednesday — when the Fed concludes its meeting to announce the next rate hike. To understand how far the Fed will go…

Investors need a history lesson from the ’70s:

1/ In the ’70s, inflation was stubbornly high — rising to 11% in 1974.

2/ In the following years, then-Fed Chair Paul Volcker raised rates — and inflation briefly fell below 6%.

3/ As inflation came down, Volcker lowered rates — which turned out to be too soon…

4/ Inflation quickly climbed back to 14.5% in 1980. Volcker raised rates back to an eye-popping 22% — forcing another recession.

Back to the future: Today, Powell is taking a lesson from the ’70s — and isn’t expected to hit the brakes on raising rates until inflation is fully under control. That’ll require taking control of rampant prices from major categories like food, rent and cars.

Going into next week: Based on Tuesday’s market moves, investors are already positioning for a larger than anticipated interest rate move.

• A 50 percentage point rate hike is off the table.
• Instead, a 75 percentage point hike is the likely scenario (70%), with investors pricing in a 30% chance of a 100 percentage point hike.

Rates are expected to rise to the 4-4.25% range by the end of 2022. There are signs of inflation slowing, but it still needs to come down significantly before we can expect the Fed to ease.