The rich but largely forgotten history of people protesting high interest rates at the Federal Reserve seems crazy today, when Americans are used to such easy access to borrowed cash.
We’re talking about the late ’70s and early ’80s here, when high inflation became so entrenched in the American psyche that hitting it shocked the system – leading to the everyday equivalent of a credit card charge today. Interest rates went up.
The drug to cure inflation set off a double-dip recession—where one recession was followed by a brief recovery and then another recession—and put millions of Americans out of work.
But he faced criticism due to low inflation.
President Jimmy Carter, who put Volker in charge of the Fed, lost his job amid a crisis of voter confidence and unease. Ronald Reagan would re-nominate Volcker for a second four-year term before the two were out.
Volker blow. People are remembering the “Volker Shock” this week, which changed the course of the US economy at the time, as today’s Federal Reserve hiked rates in a big way for the second time in a row.
For the full story of Wednesday’s hike, read these CNN Business articles:
Now, back to Volker.
what kind of rates they were looking at as volker on inflation?
Volcker’s legacy is imposing. Every story you’ve read about Volker will mention that he was 6 feet, 7 inches tall. But he has a huge legacy to match.
In addition to delivering the hard medicine that ended the runaway inflation of the ’70s, he is credited with the “Volker Rule,” which briefly barred banks from trading their assets.
He made these important points:
Volker was ready to make a tough choice. Volker believed that the Fed had to do whatever it took to get prices back. Under his leadership, the central bank raised its benchmark rate to 19% in January 1981.
There were side effects. His high interest rate policy brought about not only one, but two recessions in short order: one from January 1980 that lasted until July ’80, followed by the recession that began in July ’81 and lasted until November 1982.
By November 1982, the unemployment rate had reached 10.8%, an almost absolute percentage higher than the hit in the wake of the Great Recession 12 years earlier.
It was far worse inflation than it is today. With the consumer price index rising to a high of 14.8% in March 1980, far higher than the current rate of 8.3%, Volcker had more severe inflationary pressures to battle.
Volker faced a wage-price spiral. Many more workers had union contracts than today, and many of those contracts had cost-of-living-adjustment, or COLA, clauses that automatically raised wages when prices rose. Today it is not so.
Today the Fed has less control. Many factors of today’s high inflation are beyond the Fed’s control, including rising oil and food prices due to the war in Ukraine and supply chain problems caused by the COVID-19 pandemic, which are still raising the cost of production. Creating shortage due to multiple products and strong demand.
Inflation may become a self-fulfilling prophecy
According to former Fed official David Wilcox, now a senior fellow at the Peterson Institute for International Economics, much of the Fed’s job of controlling inflation is to make people believe that inflation has been contained.
The optimistic view is that people believe that inflation is under control. Wilcox wrote, “If households and businesses uphold the idea that inflation will return to 2% in the not-too-distant future, the Fed’s job of meeting that outcome will be much easier.”
The pessimistic view is that people think it’s here to stay. “The experience of rising prices at the gas pump and grocery store over the past year may have given homes and businesses more to expect,” Wilcox wrote. “In that case, the Fed would need to raise its policy interest rate much higher — and further economic downturns would be much deeper.”
Wilcox argued that Volcker was trying to wean Americans out of general acceptance of too much inflation. Today, Wilcox seems optimistic and predicts that inflation will subside within a year and into the targeted neighborhood of 2% within two or three years – though who knows what will happen with the pandemic and war in Ukraine.
Wilcox refers to Volcker as “the patron saint of inflation control” and notes that current Fed Chairman Jerome Powell often takes Volker’s name.
It’s usually in glossary terms. This spring, Powell commended Volcker for fighting on two fronts, “murdering, as he called it, the ‘inflation dragon’ and dismantling the public’s belief that increased inflation is an unfortunate but irreversible fact of life.” was.”
Let’s hope it isn’t and that these interest rate hikes don’t have the same unintended consequences that Volcker had more than 40 years ago.