As much as I enjoyed the recent late summer stock-market rally—and I did, believe me—I knew in my gut that it was pretty much a chimera. Ask around on Wall Street and you’ll hear variations of the same observation. Sure, there was some optimism that Fed chair Jay Powell might have foamed the runway with his last two interest rate hikes, which probably helps explain why the market got so far ahead of itself these past two months.
But there can be no “soft landing” so long as inflation is running at an annual rate of around 8.5 percent. With the Fed Funds rate at a target of 2.25 percent to 2.5 percent, real interest rates are still negative, by a factor of around 600 basis points. In other words, if Powell & Co. want to really tame inflation, he is going to have to take up the mantle of his Carter-era predecessor, Paul Volcker, who famously declared that “the standard of living of the average American has to decline.”
