Fed Must Avoid Policy Errors of the 1970s, Warns Wall Street Veteran Milken : Markets : Money Times

Markets Dec 12, 2023 10:16 AM EST

Fed Must Avoid Policy Errors of the 1970s, Warns Wall Street Veteran Milken

If past performance is any indication, renowned investor Michael Milken anticipates a cautious monetary policy stance from the Federal Reserve.

In fact, the founder of the Milken Institute, Lawrence Milken, stated on CNBC's "Last Call" on Monday that he anticipates the central bank would be careful to control inflation before beginning to lower rates in order to prevent a replay of the 1970s, when inflation reached double digits. He was speaking from Atlanta's Hope Global Forum.

Fed Must Avoid Policy Errors of the 1970s, Warns Wall Street Veteran Milken

(Photo : by Jerod Harris/Getty Images)
If past performance is any indication, renowned investor Michael Milken anticipates a cautious monetary policy stance from the Federal Reserve.

In a recent statement, Milken remarked, "History, as you know, repeats in different ways." He drew parallels with the 1970s, highlighting the Federal Reserve's early moves during that period. Milken noted that while the economy emerged from the '74, '75, and '76 period, it was followed by a resurgence of massive inflation at the end of the decade. During this subsequent inflationary phase, overnight rates soared to an unprecedented 21%.

Before the Federal Reserve loosened policy in the early 1970s, both inflation and interest rates were high. But in the end, this stop-and-go strategy was unable to stop prices from increasing.

Wednesday afternoon, when Fed Chair Jerome Powell makes the announcement of the latest monetary policy decision of the central bank, investors will be watching his remarks for clues about when the central bank plans to begin reducing rates.

Milken was dubbed the "king of junk bonds" in the 1980s. The financier, who pled guilty to securities fraud and tax offenses in 1990, was a pioneer in the field of leveraged buyouts. He received a pardon from President Donald Trump in 2020.

Others in the Banking Space

First Republic (FRC), a regional bank, was taken over by regulators early on Monday and its operations were mostly sold to JPMorgan (JPM), marking the worst bank collapse since the 2008 financial crisis.

The crisis acquisition is nothing new for JPMorgan; over ten years ago, at the height of the Great Financial Crisis, the bank paid firesale rates to acquire Bear Stearns and Washington Mutual.

JPMorgan consented to take over First Republic's $92 billion in deposits, $173 billion in assets, and $30 billion in securities.

It is anticipated that the purchase would increase JPM's net profitability by $500 million per year. Additionally, it will strengthen JPM's endeavors to obtain additional investment funds from affluent customers.

Only a few weeks have passed since Silicon Valley Bank and Signature Bank collapsed due to poor Treasury bond investments. Additionally, the market instability forced Credit Suisse, which was in trouble, to turn to UBS for help.

At the Milken Conference, executives from the banking industry, such as Jane Fraser, CEO of Citi, said that the financial system is solid following the First Republic acquisition.

Milken reassured, "The banking system itself has built up substantial equity and safeguards. So, this isn't really an issue for the overall banking system."