What if Powell retraces the policy steps of former Fed Chair Paul Volcker from 40 years ago in a quest to stamp out inflation, for good, even at the cost of an economic recession?
Federal Reserve Chairman Jerome Powell has begun talking about a “softish landing” for the economy as the central bank squares off against high inflation by raising rates and cutting its nearly $9 trillion balance sheet.
That’s a scenario that Societe Generale’s global quantitative research team studied in a client note Tuesday, now that an “inflation-fighting impulse” is in the air. The team, led by the French bank’s head of North American quant research Solomon Tadesse, concluded that it could take another 9.25% of monetary-policy tightening to stamp out inflation, should the Fed adopt a sole focus on containing inflation.
Specifically, that could mean a policy rate increase of 4.5% overall, plus a roughly $3.9 trillion reduction of its balance sheet, known as quantitative tightening, or “roughly equivalent to the net growth of the Fed’s balance sheet during the pandemic.”
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