From the recently released December issue of our monthly newsletter

Is Fed policy really as hawkish as it would like markets to believe?

Some applaud the current Fed chairman as drawing inspiration from the inflation vanquishing Paul Volcker. Others see him as charting a policy closer to that of Arthur Burns during the 1970s. One of Wall Street’s most famous Fed watchers, Henry Kaufman, says, “I am still waiting for him to act boldly. Today, the inflation rate is higher than interest rates. Back then, interest rates were higher than inflation rates. It’s quite a juxtaposition. We have a long way to go. Inflation has to come down or interest rates will go higher.”

Raising rates, in and of itself, is not necessarily hawkish (or Volckerian, for that matter). The central banks of Argentina, Venezuela, and Zimbabwe have been raising rates for years, yet their inflation rates are now 70%, 167%, and 257%, respectively, and climbing. No one would be so foolish as to characterize their central banks as hawkish (or channeling Paul Volcker). As we have said in the past, the Fed does not need to pivot to be dovish. It just needs to ensure the lending rate stays below the inflation rate. At the same time, we see signs that the interpretation of Fed policy might be shifting on that score, with the November surge in precious metals prices perhaps serving as early evidence. Gold is up 7.4% over the period; silver is up 11.6%. (11/25/2022)

Argentina inflation rate and interest rate
(%, 2008-2022)

Chart courtesy of TradingView.com • • • Inflation rate red, interest rate black • • • Click to enlarge

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