“Instead, it would exercise control over the supply of money without regard to interest rate movements. “No longer would the Federal Reserve set interest rates to guide policy,” Professor Siegel said. Siegel, the University of Pennsylvania economist, wrote in the book “Stocks for the Long Run.” Volcker “announced a radical change in the implementation of monetary policy,” Jeremy J. It’s far less important if you’re a long-term buy-and-hold investor, with a horizon of at least a decade and preferably longer, using cheap index funds that track the entire market. That’s a crucial question if you’re making short-term bets. Stocks are still down significantly, and the bear market designation will remain intact until the market returns to its peak. 3 through mid-June this year - putting stocks into a bear market - only to rebound more than 12 percent. But, of course, we don’t.Ĭonsider that the S&P 500 fell more than 20 percent from Jan. Investing would be easy if we knew how the current era would look in 40 years. Volcker’s stern treatment of the economy was deliberately disruptive, it ushered in awesome bull markets, in both stocks and bonds. It’s especially dangerous when the market’s currents are opaque and treacherously strong, as they were back then and may be now.īut, second, the Volcker era was wonderful for those with the patience and resources to ride it out. Short-term trading in stocks, bonds and commodities is a hazardous game.
Simply put, I’d say the lessons are twofold.įirst, because it had multiple, severe downturns, the Volcker era was disastrous for anyone who traded actively and bet wrong on the direction of the markets. The Federal Reserve has turned to the historical record for lessons. Volcker has come to play as the very model of a modern central banker, it’s worth looking at his era for guidance. While comparisons between the periods can be overdrawn, there are parallels. Unemployment soared, stocks fell repeatedly, interest rates oscillated and, for a while, bonds looked shaky, too. He wrung inflation out of the economy, but at a great cost - hurling the nation into not just one recession, but two, in rapid succession. Something similar happened the last time inflation was out of control. Powell, the Fed chair, raising interest rates to damp down inflation that hasn’t been this high in 40 years. That, in a nutshell, is the situation now, with Jerome H. Financial markets don’t know quite how to react. The cost of living is sky-high, and the chair of the Federal Reserve says that battling it is his highest priority.
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