There are two lessons from the 1970s for the Fed today, see chart below.
First, if the Fed turns dovish too quickly, then inflation and inflation expectations will not settle at 2%.
Second, if the economy re-accelerates, the Fed will have to raise rates a lot more.
The implication for markets is that the Fed will be keeping the cost of capital higher for longer than the market is currently pricing to ensure that the FOMC doesn’t repeat the mistakes made in the 1970s.
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