This Day in Federal Reserve History
October 6th, 2008 2:10 am | by John Jansen |October 6, 1979 is the date on which Federal Reserve Chairman Volcker announced revolutionary policy changes to fight the debilitating inflation which had ravaged America in the 1970s.
Volcker changed the operating procedures at the Fed and switched the focus of the Fed to controlling bank reserves and allowing for greater volatility in the Federal Funds rate.
The purpose of the change was to rein in the growth of the money supply which at the time was running at about 9 percent and which at that level was a principal cause of the high inflation rate.
Volcker’s policy caused much pain and a severe recession but did break the back of inflation and ultimately ushered in an era of price stability.
Here is a link to a piece produced by the Federal Reserve Bank of San Francisco on the 25th anniversary of that event.
The Volcker policy shift did lead to a dramatic rise in interest rates. When I first began this blog in January I chronicled the highest coupons attached to Treasury coupons at various points along the yield curve. For your enjoyment ( I hope) I link to that post.
5 Responses to “This Day in Federal Reserve History”
By David on Oct 6, 2008 | Reply
That is not quite right. The Volcker Fed did indeed take the advice of Milton Friedman and the Monetarists and target the monetary aggregates instead of the interest rates. However that was pretty disastrous. The rates went wild and they had little ability to control the economy. So they abandoned this. They didn’t however abandon tight monetary policy. The final squeeze came in 1981-1982 and they did indeed liquidate the world economy. This was indeed quite painful for all. I remember an anecdote where some banker saw some graffiti on a wall that said “Volcker Sux”. He was amused that they knew how to spell Volcker but not sucks. That says a lot about the times.
I recommend the book “Secrets of the Temple” by Greider which discusses the year of the Volcker Fed.
By John Jansen on Oct 6, 2008 | Reply
Greider lists to the left a bit as i recall
By soupcon on Oct 6, 2008 | Reply
I’m of the right, and think the monetarists got it terribly wrong.What broke inflation was allowing the tax cuts to work, as Volcker created a horrible deflation culminating in Mexico almost defaulting in Aug 1982.Once he flooded the banking system with the funds that it craved, output began to rise and that excess inflation got absorbed by productive output.Growth, not Volcker, tamed inflation.
By John Jansen on Oct 6, 2008 | Reply
I think though that none of that would have been possible without the wrenching experience of the 1981 recession. That began the purging process and led to the slow shift in expectations.
By soupcon on Oct 6, 2008 | Reply
You didn’t a need a purging process.Why? Purge what and for what good? Volcker flew blind for a very long time, and he helped to push rates down too much into 1983,began draining from mid ‘83 to Feb 1985 to curb that inflation, leading to a horrible dollar deflation, that turned into a dollar inflation by mid 1986, leading to the bond rout in 1987 and the draining that took place before the crash.Greenspan carried on the tradition of the Fed lagging behind markets which continues to this day.