Hantu "Pembantaian Sabtu Malam" 1979: Keraguan Fed untuk Menurunkan Suku Bunga adalah Ketidakmauan untuk Menjalani Jalan Lama Volcker!

The Federal Reserve is facing a historic policy dilemma — the Middle East situation is pushing oil prices higher, and the emergency monetary policy action known as the “Saturday Night Massacre” in 1979 is profoundly influencing current policymakers’s thinking frameworks.

As concerns about stagflation intensify, market expectations for a rate cut by the Fed this year have significantly waned. Taking the September FOMC meeting as an example, the implied probability of a rate cut in futures markets has plummeted from about 90% a month ago to 50%, a trend that has persisted through all of this year’s meetings.

Tonight, the Fed is expected to remain on hold. The statements from Chairman Powell at the post-meeting press conference, along with the economic forecasts from FOMC members, may further clarify the policy direction, but the market generally remains pessimistic.

For investors, this means the trading logic of “bad news is good news” that prevailed over the past two years is collapsing. The tech-sensitive Nasdaq 100 index is currently only about 5% below its all-time high, but has been almost stagnant since mid-February — precisely when Middle East tensions tightened and rate cut expectations began to decline.

“Saturday Night Massacre”: How historical lessons shape current decisions

In October 1979, then-Fed Chairman Paul Volcker convened an emergency meeting to aggressively raise interest rates to suppress inflation. The global stock and bond markets suffered heavy losses, an event known as the “Saturday Night Massacre.” The cost of this action was extremely high: the US economy fell into a double-dip recession, US Treasury yields soared, and Jimmy Carter’s bid for re-election was hindered.

Volcker is a hero whom Powell publicly respects. Bond traders generally believe that the Fed is now viewing the situation through the same historical lens: a little prevention now is better than a big cure later. No policymaker wants to repeat the mistake of resorting to extreme tightening measures like Volcker.

The lessons of the 1970s are clear: inflation spiraled out of control amid two energy crises, and the Fed failed to respond decisively in time, ultimately paying a heavy economic and political price.

Oil Price Shocks Reshape Rate Cut Path

The ongoing tension in the Middle East is transmitting through oil prices into monetary policy.

Bob Elliott, Chief Investment Officer of Unlimited Funds and a veteran macro hedge fund manager, wrote in a report: “Although many expect the Fed to turn to easing in the face of oil shocks, the best outcome is to stay on hold, and if the situation worsens, the likelihood of rate hikes will increase.”

This sharply contrasts with the market narrative of the past two years. Previously, even with stubborn inflation, investors were eager to bet on the Fed cutting rates, and weak economic data — including sluggish employment growth over the past year — was often seen as a “half-full” reason to keep buying stocks.

Since the Fed resumed its easing cycle in September 2024, it has cut rates six times, including a 25 basis point cut in December last year. However, if the blockade of the Strait of Hormuz leads to further supply shortages, this may be the last rate cut for quite some time.

Stock Market Has Not Fully Priced in Policy Shift Risks

Despite the significant decline in rate cut expectations, some market participants still seem to have not fully digested this policy signal. The Nasdaq 100 is only about 5% below its all-time high, indicating that valuations of large tech stocks have not fully reflected the tightening of interest rate environment.

Except for sectors benefiting from rising commodity prices, further deterioration of Middle East tensions would be purely negative for stocks. To truly shake the Fed’s policy stance, the situation would likely need to become “quite ugly.”