Ahead of the Curve. The Fed is aiming to get ahead of the inflation curve. Asset price deflation is being accommodated in the process. No more Fed puts. Digital asset markets are a window into how markets were intended to work – brutally expunging weakest links with tighter credit conditions as asset deflation cleanses all pockets of undue leverage. It is a culling of hubris, a return to austerity. It is also increasingly evident in traditional markets. The narrative of the Fed being behind the curve is stale, yesterday’s story. And the market doesn’t believe it anyhow. Long-term inflation expectations are anchored as the bond market expects the Fed to execute a recession to tame inflation. But what will the next recession look like? In every previous Fed tightening cycle, two definitive patterns emerge: inflation falls sharply, and the Fed eases policy. Without fail. But tightening cycles that start from a higher rate of inflation make life more difficult for policy. In the 1969, 1974, and 1980 recessions, core inflation fell by more than four percentage points on average. The Fed cut rates, substantially. But core inflation declined to an average of 6% in those three periods. Tightening resumed sooner. Cycles ran short and hot as the post-recession easing was an error. Today’s severe challenge is the starting point of policy. In all tightening cycles, recessions started with policy rates above the rate of core inflation. Not now. This can greatly constrain the policy response to the recession. Being hawkish when unemployment and inflation are miles from the target is the easy part. It is more challenging when unemployment and inflation are both too high. And that’s the next recession. Markets are cheerleading into an economic downturn with hopes that it brings the “Fed put” back into play. Easing after the recession will signal whether policy is serious about its return to orthodoxy. After all, that’s what defined Volcker’s moment.