The Volcker Method: Can the Fed Kill Inflation?

The Volcker Method: Can the Fed Kill Inflation? Fed rates are not the most important factor in the current market. Tomorrow Fed could change things dramatically: new forecasts could set direction for monetary policy in the coming months.Since the July meeting and the publication of a higher-than-expected CPI, the debt and futures markets have significantly changed their assessment of the immediate prospects. Futures on the federal funds rate now point to the possibility of an overnight rate in April at 4.45%.At the moment, the quotes are based on a long-term forecast of the rate at level of 4.0% by December 2023. If now Fed's forecasts seem too weak to the markets, then there will be a risk of easing financial conditions, and this is exactly what Fed does not want.Inflation is above 8%, core inflation is above 6%, but the base case for tomorrow is a 75 bp rate hike. Why not raise the rate to 5.5-6% in order to immediately solve all the problems? Indeed, more than 40 years ago, Paul Volcker raised the rate immediately to 20% per annum and, after the oil crisis of 1970s, managed to reduce inflation from 14% to 3,6%.Alas, today's America can no longer afford such a luxury, because the cost of debt servicing has risen too much. During Volcker's time, the national debt was 32.5% of GDP, but since then the US GDP has grown 7 times, and the national debt  33 times. In 2019, the US paid $567 bln in interest expenses on public debt or 17% of budget revenues. The average rate was 2.5%.A sharp rate hike would trigger a huge wave of defaults and bankruptcies, and exacerbate the overall recession - both globally and in the US. Such a move will cause panic and a flight from national currencies to the dollar. The too fast growth of the US rate can provoke a severe liquidity crisis and, most importantly, a crisis in the real estate market.So Jerome Powell, unlike Paul Volcker, has practically no freedom of manoeuvre. Therefore, we move in small but consistent steps. The main thing is to choose the right target.Profits to yall!