A 1970s Warning for 2025

The Federal Reserve’s latest rate cuts echo the policy missteps of the 1970s, when easy money fueled runaway inflation and market turmoil. CME Group economist Erik Norland joins Andrew Wilkinson to discuss the risks of history repeating itself as investors chase gold, crypto, and tech.

Summary – IBKR Podcasts Ep. 296

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to today’s episode. This week, the Federal Reserve eased policy by 25 basis points at its September meeting. The outlook—and the consensus—seems to suggest there will be more before the end of the year. To discuss this, I’d like to welcome back to the IBKR Podcast, Erik Norland. Erik is the Group Economist with CME Group over in Europe. Welcome, Erik. How are you? 

Erik Norland 

I’m doing well. Thank you for having me. 

Andrew Wilkinson 

You are always welcome back on this program. Now, the employment situation has deteriorated markedly in the past several weeks. To that extent, did the Fed surprise you at the meeting yesterday? 

Erik Norland 

It was widely expected. If you look at our Fed funds futures and what the market priced in, it was basically a 100% chance of a 25-basis-point cut, and even some probability of a 50-basis-point cut. So it didn’t really come as a surprise to me, and certainly not to the market. When you look at the employment situation, it’s not really that bad. It is true that non-farm payrolls have barely grown over the last few months, but they’re also not negative. It’s like nobody wants to make any decisions—nobody’s hiring, but nobody’s doing mass layoffs either. So the labor market has just stalled out. 

On the other hand, wage growth is still 3.9% year-on-year. The unemployment rate is at 4.3%. It’s been creeping up very slowly, a few tenths of 1% per year for the last two and a half years. But there was really nothing in the labor data that struck me as so alarming that we immediately had to cut rates. 

Andrew Wilkinson 

So what are the risks, Erik, of easing monetary policy when inflation is still above target? 

Erik Norland 

Headline inflation is running at 2.9%. Core inflation, more worryingly, is at 3.1%. Both have been rising recently, and this is part of a global trend. Around the world, I can only think of two countries with below-target inflation: China—which is big—and Switzerland—which is small, but wealthy. Everybody else has inflation above target, and in almost all of those countries, like the US, it’s starting to rise. Yet all of these central banks, for some reason, are cutting interest rates. The risk is that you wind up with much more inflation down the road. I would point to the early 1970s, when President Nixon appointed his friend and political ally Arthur Burns to run the US Federal Reserve. He kept monetary policy too easy, for too long, and we wound up getting inflation from 2.5% up to around 12% by 1974. 

By the time Burns left the Fed in 1978, inflation was running around 6–8%. Then Carter replaced him with his ally G. William Miller, who essentially coordinated Fed policy with the Treasury Department. He was described by one of Alan Greenspan’s biographers as the most partisan and least respected person ever to run the Fed. He managed to get inflation up to 14%. That’s the risk. 

Andrew Wilkinson 

And I think you and I were talking about this just moments before we started recording. When I was trading money back in the nineties in London, the Bundesbank’s sole mandate was inflation, was it not? What do you think the chances of getting an interest-rate cut out of the Bundesbank would’ve been yesterday? 

Erik Norland 

Oh, they would’ve raised rates. If it was the Bundesbank, they would not have cut—they would have been raising rates. Even in the early days of the ECB, the first two chairmen, Wim Duisenberg and Jean-Claude Trichet—though Dutch and French—basically created the ECB as a Europe-wide Bundesbank. The two of them used to constantly, at every press conference, talk about the importance of keeping inflation expectations anchored. 

Andrew Wilkinson 

Yeah. 

Erik Norland 

The problem is that inflation expectations in the US are coming unmoored. If you look at the University of Michigan Consumer Confidence Survey, the most recent numbers show Americans expect 4.6% inflation in the next year, and 3.9% on average over the next five to ten years. That’s very different from a few years ago, when they expected more like 2–3%. As consumers come to expect more inflation, it can become a self-fulfilling prophecy. If you think your money is going to lose its value, what do you do? You rush out and spend it quickly, which boosts demand and consumer spending. That demand then outstrips the supply of goods and causes prices to drift higher. 

Andrew Wilkinson 

Erik, you’ve mentioned the labor market and inflation, and we’ve discussed monetary policy. What are your overall thoughts about the US economy from where you are situated? 

Erik Norland 

The US economy has a lot of contradictions, and there is a case for cutting rates. Unemployment has been drifting upwards for quite some time now. It bottomed at 3.4% about two and a half years ago in Q2 2023, and it’s now up to 4.3%. So clearly there is some softening of the labor market. At the same time, there are huge numbers of open positions. There are 7.3 million job openings according to the JOLTS survey—about as many as we had at the peak of the expansion in 2019. 

Consumers also express a lack of confidence in surveys like the University of Michigan or the Conference Board. But here’s the question: who’s not confident? Primarily, it’s people earning less than $100,000 a year. Meanwhile, people earning more than $100,000 are seeing their stock portfolios at records, earning high incomes, and spending heavily. That spending is driving consumer demand higher month after month. Default rates show stress—credit card and auto loan defaults are rising. Many American families, especially lower-income households, are under strain. Yet, if you look at credit markets—such as CME’s new futures on high-yield and investment-grade bonds—spreads have never been narrower. 

So you have the stock market at record highs, narrow credit spreads, a reasonably strong economy, and inflation creeping up. The overall picture is an economy that might be getting ready to overheat—and we might be pouring gasoline on the fire by cutting interest rates in this environment. 

Andrew Wilkinson 

Erik, let’s turn to recent political events in France. Were you surprised that investors shrugged their shoulders at the latest collapse inside the French government? 

Erik Norland 

I think it was widely anticipated. As a result of the elections held in June or July last year, the National Assembly essentially has a third on the left, a third in the center, and a third on the right. So pretty much anybody President Macron chooses is going to struggle to run the country, which is why he’s been going through Prime Ministers at such a rapid clip. 

That said, there is some degree of distress in the French debt market. The ECB has been lowering its rate, so French two-year and five-year bonds—the BTANs—have been coming down in yield. But the longer-term ones—the OATs, the ten-year and especially the 30-year bonds—have generally been rising. Maybe not over the last week or two, but certainly over the last few months their yields have been increasing. I think there’s a lot of reticence on the part of investors to lend money to the French government long term. And they’re not alone. The UK’s government and Japan are also in a very similar situation. 

Andrew Wilkinson 

Erik, we’re heading towards the end of September, which means we’ll be jumping into the fourth quarter. Any thoughts on the rest of the year? What does it hold for investors? 

Erik Norland 

What we’ve been seeing from investors so far—especially in the third quarter—has been a strong desire to buy assets that central banks cannot create. They’ve been pouring money into gold, silver, platinum, and palladium. They’ve been buying certain cryptocurrencies, especially Solana and XRP, but also Ether and, to a lesser extent, Bitcoin. 

They have been avoiding long-term government bonds for the most part, although we did have a little bit of a rally in long-term Treasuries that now seems to be over. And lastly, they’re still plowing money into technology companies. 

So I think with a rate cut, this party might really get going—especially if the Fed keeps easing policy as it signaled it is likely to do. It said it expects to cut at least two more times before year-end. Combine that with possible tariff effects on inflation, and we could see consumer price inflation drifting higher as rates come down. That could really get people interested in buying things that central banks can’t print. 

Andrew Wilkinson 

It’s going to be a little strange from here. If the stock markets go up, it’s going to give us the sensation that everything’s okay. But if the stock markets come down, we’re going to start feeling concerns about the wealth effect—or that the reality might seem worse than it actually is, right? 

Erik Norland 

Yeah. The analogy I would make is what happened in 1971. After Arthur Burns had been in office for about a year, he and Richard Nixon basically severed the link between the dollar and gold. That meant a massive monetary expansion in the US ahead of the 1972 presidential election. You might laugh at this, but it happened on Sunday, August 15, 1971. When the markets reopened the next day, Monday, August 16, the Dow had its biggest up day ever—it was up 33 points. The market continued to rally, and by the standards of the time it had a really nice rally through December 1972. So it had about 16 months of rising prices. It was basically a 16-month-long party at the beginning of Arthur Burns’ helm at the Federal Reserve. 

Then inflation really struck. The stock market fell 47%, inflation went to 12%, the bond market crashed, yields soared, and investors lost a lot of money. We had an extremely deep recession amid higher inflation. Unemployment went from 4.4% to 8.8%—maybe in part because of a wealth effect hitting investors who had lost so much money in both the stock and bond markets simultaneously. 

Meanwhile, gold prices continued to soar. Silver soared. It was a pretty interesting middle part of the decade. That’s the kind of thing that could potentially result here. We could see the equity market go much higher. But eventually, if we get hit with higher inflation, the Fed may have to reverse course and raise rates a great deal—like they did in the seventies. That could be very negative for the stock market, especially given its extraordinarily high valuation levels. 

Andrew Wilkinson 

What was it they say—the cure for a high stock market is…? 

Erik Norland 

Well, with commodities they say, “The cure for high prices is high prices.” It incentivizes production. I don’t know what the cure for high stock prices is. 

Andrew Wilkinson 

Higher prices—and then when they fall, they become more affordable. 

Erik Norland 

I guess, yes. That’s the thing. There are so many investors who, since 2009, have learned that any sell-off is a buying opportunity. And that will be true—until one day, when it’s not. 

Andrew Wilkinson 

Yeah. And it certainly appeared to be true back in April… 

Erik Norland 

Yes, that’s right. 

Andrew Wilkinson 

…with the launch of the tariff campaign. Alright, Erik, thank you so much for joining me today. I always appreciate your insight—and particularly today, the history lesson. 

Erik Norland 

Alright. Thank you for having me. 

Andrew Wilkinson 

And to the audience—thanks for joining me. Don’t forget, if you enjoyed today’s episode, to subscribe to this channel wherever you download your podcasts. Bye for now.