The Ghost of "Saturday Night Massacre" in 1979: The Fed Hesitates to Cut Rates, Unwilling to Follow Volcker’s Old Path!

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The Federal Reserve is facing a historic policy decision—rising oil prices driven by the Middle East situation, while the emergency monetary policy action known as the "Saturday Night Massacre" in 1979 is deeply influencing the current decision-makers' mindset.

As concerns over stagflation intensify, market expectations for Fed rate cuts this year have retreated significantly. Take the September meeting as an example: the implied probability of a rate cut in the futures market has plummeted from about 90% a month ago to 50%, and this trend runs through all meetings this year.

Tonight, the Fed is expected to hold rates steady. Chair Powell’s statements at the post-meeting press conference, along with the economic forecasts from Federal Open Market Committee members, may further clarify the policy direction, but the market generally holds a pessimistic outlook.

For investors, this means the “bad news is good news” trading logic of the past two years is collapsing. The interest-rate sensitive Nasdaq 100 Index is currently only about 5% from its all-time high, but has been nearly flat since mid-February—precisely when the Middle East situation tightened and rate cut expectations began to decline.

"Saturday Night Massacre": How History Shapes Decisions Today

In October 1979, then Fed Chair Paul Volcker held an emergency meeting and suppressed inflation with aggressive rate hikes, triggering a devastating blow to global stock and bond markets—an event known as the "Saturday Night Massacre." The cost was extremely high: the U.S. economy fell into a double-dip recession, Treasury yields soared, and Jimmy Carter's bid for re-election was thwarted.

Volcker is Powell's publicly acknowledged personal hero. Bond traders generally believe the Fed is viewing the situation through the same historical lens: a bit of prevention now is worth much more than cure later. No policymaker wants to repeat history and be forced into Volcker-like extreme tightening measures.

The lesson from the 1970s is clear: inflation was driven out of control by two energy crises, and the Fed’s failure to respond decisively and promptly ultimately led to heavy economic and political costs.

Oil Price Shock Reshapes Rate-Cutting Path

Ongoing tensions in the Middle East are being transmitted to monetary policy through oil prices.

Bob Elliott, CIO of Unlimited Funds and a veteran macro hedge fund manager, wrote in a report: "Although many expect the Fed to turn dovish in the face of an oil price shock, the best outcome is holding steady, and if the situation worsens, the likelihood of rate hikes will increase."

This stands in sharp contrast to the market narrative of the past two years. Previously, even when inflation was stubborn, investors were keen to bet on the Fed’s rate-cutting pace; weak economic data—including sluggish job growth over the past year—was often interpreted as a “half-full glass” reason to keep buying stocks.

Since restarting the easing cycle in September 2024, the Fed has cut rates six times in total, including a 25-basis-point cut last December. However, if a supply shortage caused by a blockade of the Strait of Hormuz worsens, this might be the last rate cut for a considerable period of time.

The Stock Market Has Not Fully Priced In Policy Shift Risk

Although rate-cut expectations have shrunk significantly, some market participants seem not to have fully digested this policy signal. The Nasdaq 100 is only about 5% from its all-time high, showing that large-cap tech stock valuations have not fully reflected the pressure of a tightening interest-rate environment.

Aside from a few sectors benefiting from rising commodity prices, further deterioration of the Middle East situation would be pure negative news for the stock market—and to truly shake the Fed's policy stance, things may need to get "quite ugly."

Risk Warning and DisclaimerThe market carries risks; investments should be made cautiously. This article does not constitute personal investment advice and does not take into account individual users' unique investment goals, financial statuses, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their specific circumstances. Investment decisions based on this content are at your own risk. ```