Lessons From The Volcker Shock

The Fed had to inflict a lot of pain in the ’80s to convince markets it was serious about slaying inflation

- Christine Harper

Paul Volcker was feeling a bit forgotten in late 2017 when he started working on his memoir, which I was helping him write. Inflation was no longer feared, exchange rate crises weren’t big news, and his longtime campaign to improve public administration seemed more quixotic than ever. So the 90-year-old former leader of the US Federal Reserve started his book with a self-deprecating joke about a wise old parrot known as “the chairman,” and insisted the title should be The Wise Old Parrot Speaks.

Understandably, the publisher’s marketing staff wasn’t keen on that. Eventually, I threw out the phrase “sustained commitment,” which I’d spotted in some old Fed minutes. Volcker’s face lit up as he translated it into plain language: “Keeping at it!” We had our title.

Today everyone wants to know if, and how soon, the Federal Reserve can bring inflation under control. Chair Jerome Powell, keen to show he’s on the case, has said the Fed will “keep at it” until the job is done—a phrasing that some seasoned Fed watchers say is meant to invoke the spirit of the man who’s been called the Greatest Central Banker of All Time. Yet while Volcker is celebrated for conquering inflation, few remember how tough the fight was and how much pain the economy endured. To see the challenge ahead for Powell, it’s useful to revisit Volcker’s bumpy path to victory. 

When President Jimmy Carter appointed Volcker Fed chair in August 1979, the central bank was also facing a crisis. Volcker had watched his two predecessors, Arthur Burns and Bill Miller, lose all credibility by failing to deal effectively with rising prices, allowing an inflationary mentality to become entrenched among the public.