Fed needs to deliver a shock

The US Federal Reserve needs to deliver a Volcker-style shock to drive down asset prices if it wants to slow inflation without causing a recession, according to Credit Suisse Group strategist Zoltan Pozsar.

Policymakers should stoke volatility to set off corrections in assets including stocks, houses and bitcoin, deterring early retirement and driving people into the workforce, Pozsar wrote in a note to clients.

His comments harked back to the way then fed chair Paul Volcker broke the back of inflation in the 1980s with massive rate increases.

The difference this time is policymakers need to bring “about more supply of labour, not less demand for it”, and slow inflation in services which is driven up mainly by higher housing costs and the availability of workers, Pozsar said.

The key to turning those drivers around is to tighten financial conditions by increasing longerterm borrowing costs that underpin asset valuations, the influential analyst said.

“Maybe the Fed should hike 50 basis points in March, put an end to press conferences, and sell $50bn [about R747bn] of 10-year notes the next day,” Pozsar wrote.

It’s a view that highlights the windfall that years of quantitative easing has had for capital owners, a policy that critics say has inflated asset prices and contributed to rising inequality.

Fed chair Jerome Powell has pledged to bring under control the strongest inflation in four decades. Yet the pace of rate increases required, according to market pricing, would make a severe slowdown in the economy all too likely.

Complicating the picture is that goods prices have turned into a sustained source of price pressures, Pozsar said.

Meanwhile, the Fed’s updated dual mandate calls for it to avoid creating recessions and yet it can only rein in goods costs through rapid interest rate hikes that will curb demand.

Bond traders are now pricing in just over six 25basis-point hikes this year but long-term borrowing costs have not moved up enough. In particular, mortgage rates need to get noticeably higher, Pozsar said.

The average 30-year US mortgage rate climbed almost 1 percentage point this year to 4.23%, according to Bankrate.com

This is still about half a point below its 2018 peak. —