The only Fed Chairman who took some determined steps to fight the “inflation bull” heads on with both hands in my living memory was Paul Volcker. He was also the Fed Chairman when I entered the industry. So I know a lot about him. He was not a Keynesian or a monetarist but a pragmatist. He was the right person at the right time to solve a major problem and he did a great job.
He was a Democrat and was brought into office by President Jimmy Carter. But he thrived under Republican President Ronald Reagan. The Fed’s independence was last seen under the chairmanship of Volcker. He took some bold steps driving interest rates up to 20% in 1980, no doubt manufacturing a recession. But he did it all for the greater good. Imagine putting all your wealth in a 30-year government zero-coupon bond in 1980. Probably the best risk-adjusted investment anyone could have in one’s life.
At 6 foot seven inches, Volcker was even taller than Michael Jordan and probably beat the average height of any basketball team in the world. His middle name was Adolf but it’d be unfair to hold that against him. He was a simple and humble person.
In my former days as an active institutional trader, I would be contacted by sales people from all major investment banks from Tokyo to New York time. Over the years, I developed personal friendships with some and only professional relationships with others. I had this friend from Chemical Bank NY (which later became a part of JP Morgan) who used to call me always just before the NY markets opened. He always had some amusing story to tell. One day he asked me, “guess who I met on the tube today”. I was totally clueless and I rattled off, “Robert Redford, Paul Newman or Marlon Brando as they were all the leading movie actors of that era”. He laughed and said, “somebody even bigger and powerful”. Then I sarcastically said, “Was it Reagan, that you met?” He laughed and quipped, “actually in our business context, he is even more powerful than Reagan”. I could barely hide my frustration and demanded to know who he was. “Paul Volcker”, he blurted out. He said it was not the first time that he was seeing Volcker riding the metro. He had a New York Times paper in his hand and he always got down at Wall Street station. The Fed office was just outside it.
Much later in life and about a decade ago, I had the privilege of meeting Paul Volcker personally and having a brief conversation with him. He was a keynote speaker at the yearly global markets conference held by NBAD (now FAB) Abu Dhabi for three days which I had the privilege of attending.
I think he was the quintessential central banker. Not long before he died, he gave an interview where he emphatically remarked that what he’d achieved then, could not be achieved now as the world had become more of a ‘global village’ with many interlinkages that could create ripple effects of various unpredictable degrees around the world.
It is very important that the Fed and the government sing the same chorus from the same hymnbook. And in Volcker’s case, he had the full support of President Regan.
It was not the same for another central banker William Martin. Martin was opposed to President Lyndon Johnson’s demands for keeping interest rates low as the Vietnam war was creating very high inflation in the US. Finally, Johnson summoned Martin to his ranch in Texas. After a bit of discussion, things got heated up and Johnson chased Martin around his living room and shoved him to a wall and shouted on his face “boys are dying in Vietnam and Bill Martin doesn’t care”. Bill Martin didn’t succumb to LBJ’s threats. You cannot expect much from a president who took his oath to become president at 35,000 feet above the earth. He was literally and figuratively disconnected from reality on earth.
Physically assaulting a Fed Chairman is inarguably a greater threat to the Fed’s independence than questioning the Fed’s policies on Twitter. That’s what President Trump used to do with Fed Chairman Jay Powell. I sense that Powell is also an honorable and decent man. He never publicly criticized the President for all the abuses that Trump hurled at him over Twitter. That is probably because he respected the chair of the President’s office than the President himself.
In a townhall meeting last August, Jay Powell made some very complimentary comments about Volcker. He admiringly (flatteringly?) called him “the most distinguished public servant in economics, in his (Powell’s) lifetime”. And he said he admires him because of his courage to take on the unpopular, but necessary path of beating what Powell calls the Great Inflation.
If you think Powell will also turn out to be an inflation fighter, there will be a conflict with the White House. Biden doesn’t want an inflation fighter on his watch with all the new ideas that are being rolled out now.
Maybe it is on the back of this that Biden interviewed Lael Brainard, one of the most dovish governors, last Friday. If Powell does not make the right moves and comments publicly, he could be replaced as his term comes up for renewal early next year. Brainard is pro Central Bank Digital Currency (CBDC) and she will execute on Biden’s social and climate agenda.
Calling an equity market top will depend on how the dynamics between Fed and the White House will play out.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is setting up a hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.