History shows inflation can take years to return to normal even when the Fed hikes interest rates above 10%

Now there's a risk that price gains could take much longer than expected to fall back down, even when the Federal Reserve is aggressively hiking interest rates.

In 1980, with the Fed's main policy rate target already above 10% for most of that year, the annual headline CPI, also in double digits, still did not fall back below 3% after 36 months "Even on the back of unprecedented rate hikes enacted by Fed Chairman Paul Volcker," they said.

In July 1973, when the annual CPI rate was hovering near 6% but poised to keep climbing, a Burns-led Fed pushed the fed-funds rate above 10%, FactSet data shows.

Policy makers brought interest rates down to 9% for six months, then pushed them back up again to 10% or higher through mid-1974.

Policy makers returned to pushing rates above 10% again, even before Volcker took the helm.

No one is suggesting the Fed is about to resort to double-digit interest rates right now, particularly when the fed-funds rate target is only between 0.75% and 1% with two more 50-basis-point hikes on the way for June and July.

"There are aspects of the historical pattern that are very relevant: Namely, that inflation took a number of years to develop, kept growing, receded, then came back and was hard to get rid of," said Mace McCain, chief investment officer at San Antonio-based Frost Investment Advisors, which manages $4.7 billion.

https://www.marketwatch.com/story/investors-may-be-in-for-this-rude-surprise-history-shows-inflation-can-take-years-to-return-to-normal-even-when-fed-hikes-above-10-11654192355