Inflation emerged as an economic and political challenge in the United States during the 1970s. The monetary policies of the Federal Reserve board, led by Volcker, were widely credited with curbing the rate of inflation and expectations that inflation would continue. US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983. The Federal Reserve board led by Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime rate rose to 21.5% in 1981 as well, which helped lead to the 1980–1982 recession, in which the national unemployment rate rose to over 10%. Volcker’s Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building.US monetary policy eased in 1982, helping lead to a resumption of economic growth.
IIRC, Volker did repeat the mistake of his predecessor, Arthur Burns, of lowering rates too soon and having to raise them again. For Volker the second round was the one that worked. Of course, the economy went through two back-to-back recessions.
Yes, that’s right. You can see it in these charts. (Although the inflation rate and GDP are a little hard to see in the long sweep of history.)
There were two recessions, 1980-81 and 1982-83. But unemployment didn’t come down. It seemed like it would go on forever when I was living through it. Factories were going out of business, laying off employees, never to reopen. I wasn’t affected personally but I was in the middle of it.
It took a lot of backbone for Volcker to hold to his strategy in spite of tremedous pressure to ease.
The Fed has the potential (occasionally achieved) to act independently from politics as an association of bankers charged with the structuring of the nations currency. Turning it into a political pawn is a recipe for (even) sillier behavior.
A couple of weeks ago, I started researching the backgrounds of the various Fed regional bank presidents and other top leadership of the Fed. I was pleasantly surprised to learn that most were academics, with perhaps some banking experience in their early careers. I don’t recall any of them coming from a political background.
That struck me as a pretty good way to mitigate the inevitable pressures from both the banking industry and politicians.
I think that independence is vital to the functioning of the Fed.