A little over six months ago, when stocks were still trading near all time highs, former NY Fed repo guru and current Credit Suisse strategist Zoltan Pozsar made an immodest proposal to the Fed: crash stocks to contain inflation, to wit:
The FOMC has one big problem: inflation. There are two ways to slow inflation: by hiking short-term interest rates or by forcing long-term interest rates higher. Historically, the Fed used rate hikes to engineer recessions that generated the slack needed to keep inflation in check (“opportunistic disinflation”). With the Fed’s “updated dual mandate” of inclusive low unemployment and the political imperative of redistribution through firmer wage growth at the bottom of the income distribution, the Fed aiming to slow inflation via a recession is unimaginable. Hikes today then are meant to slow inflation without a recession… which is not something that the Fed has ever managed to achieve before.
Zoltan was also confident that “lower risk assets won’t kill growth” and his solution to contain inflation and “to improve labor supply, the Fed might try to put volatility in its service to engineer a correction in house prices and risk assets – equities, credit, and Bitcoin too…” In short: crash everything.
