Volcker’s Lesson for Today’s Fed: Don’t Pivot

In the estimation of some economic observers, today’s Federal Reserve should heed the wisdom of Paul Volcker, who led the Federal Reserve during the last great bout of inflation. That is, don’t waver in the fight against spiraling prices, even in the face of an economic downturn—as that stance, argued PIMCO’s Tony Crescenzi in a recent post, is why Volcker was successful. In today’s Wall Street argot, Volcker didn’t “pivot.”

Volcker, during his turbulent tour as Federal Reserve chair (1979 to 1987), is viewed by many as the economic savior who defeated debilitating double-digit inflation. This was an exercise in tough love, to say the least. His relentless push to raise interest rates touched off two recessions.

But a key part of his success was that he didn’t back down from his campaign—and killed off the prevalent public notion that more inflation was inevitable, Crescenzi argued in a post on LinkedIn.

Crescenzi, a strategist for the asset manager and its executive vice president, castigated the current hope of many in the financial world that the Fed, now embarked on a steady program to elevate interest rates, will reverse course. That is, pivot.

Volcker’s example “should cast doubt on any notion of a quick about-face in Fed policy that results in rate cuts in 2023,” Crescenzi wrote. Volcker, he added, “understood the importance of inflation psychology and of combating the public’s perceptions about high inflation with bold action.”

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To Crescenzi, the current Fed head, Jerome Powell, is in Volcker’s unrelenting mold. “Powell is almost certainly aware of the lessons that Volcker provided, in particular the importance of taking actions that constrain the pervasive influence of unstable inflation expectations,” Crescenzi opined.

In Crescenzi’s view, the Powell Fed’s plan for next year involves attaining a “positive real federal funds rate,” meaning the central bank’s benchmark rate will exceed inflation. Right now, it is some 6 percentage points below the Consumer Price Index.

There are other Volcker-esque tactics the Fed should follow, he declared. One is “hesitance to lower the funds rate when the inflation rate declines.” Another is not returning to bond buying.

Some have criticized the Powell Fed for not moving sooner to tackle inflation, now running at 8.5%. But to make up for lost time, Powell is taking advantage of a gift Volcker gave him: faith in the Fed. People now believe that the Fed can and should conquer high inflation, the PIMCO executive noted.

Quoting Volcker, who died in 2019, Crescenzi wrote: “Vacillation and procrastination, out of fears of recession or otherwise, would run grave risks.”

Related Stories:

Will the Federal Reserve Go Too Far?

A Fed Pivot? Not a Chance, Says the Futures Market

The Plus Side of Rising Interest Rates: Lower Pension Liabilities

Tags: Consumer Price Index, federal funds rate, Federal Reserve, Inflation, Interest Rates, Jerome Powell, Paul Volcker, PIMCO, recession, Tony Crescenzi

Australia’s Environmental Defenders Office, an environmentally focused law center, has accused A$68 billion ($47.2 billion) superannuation fund HESTA of “greenwashing” and putting its participants at risk due to investments in two major oil and gas producers.

The EDO sent a legal letter to HESTA expressing its concerns that the pension fund’s investment in Woodside Energy and Santos, which according to the letter are major contributors to global warming, pose a financial risk to its members. The letter says the trustees of HESTA and its directors may be in breach of their obligations under the Superannuation Industry Act 1993 based on how they are managing the fund’s climate risks.

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The EDO letter also says that HESTA’s advertising and net-zero investment portfolio claims amount to greenwashing. The letter cites a list of claims HESTA makes on its website relating to its commitment to sustainable investing. In 2020, HESTA claimed to be the first major Australian superannuation fund to commit to reducing its investment portfolio’s absolute carbon emissions by one-third within 10 years, and becoming “net zero” by 2050.

Citing HESTA’s latest portfolio holdings disclosure as of the end of 2021, the EDO’s letter says the pension fund has more than A$2 billion invested in companies expanding fossil fuels, including A$228 million in Woodside and A$190 million in Santos. The letter also says both companies are actively pursuing new fossil gas projects in Australia, and that the EDO has separate legal proceedings underway against them over the projects.

“As the world de-carbonizes, there is a real and foreseeable, and potentially substantial, risk that investment in gas projects is investment in ‘stranded capital,’” the letter states. It cites the International Energy Agency’s definition of stranded capital as investment in fossil fuel infrastructure that is not recovered over the operating lifetime of the asset due to reduced demand or prices resulting from climate policies.

“Continued investment in Woodside and Santos is an investment in stranded assets that could lead to negative member financial returns,” the letter says.

According to the EDO, neither Santos nor Woodside’s “net zero pathway” involves a reduction in scope 3 emissions that is aligned with the Paris Agreement. In addition, HESTA “has failed to adequately interrogate the net zero claims/emissions reduction representations made by companies in which member funds are invested,” per the letter, which also notes that HESTA has recently voted against shareholder proposals that requested Woodside and Santos disclose plans for how aligning capital allocation to oil and gas assets will help them achieve net-zero emissions by 2050.

In response to a request for comment on the EDO’s letter and claims, a HESTA spokesperson tells CIO that “we can confirm that we‘ve received the letter and are currently reviewing it.”