Vol. 01 – The Volcker shock
3
Volcker comes on the scene Following the sharp rise in inflation in late 1970’s, President Jimmy Carter shuffled his economic policy team and nominated Paul Volcker in August 1979 to become chairman of the Fed in large part because of his anti-inflation views. Indeed, Volcker had previously served as President of the New York Fed and had dissented from Fed policies as he felt strongly that mounting inflation should be the primary concern, believing the institution was facing a credibility problem when it came to keeping inflation in check. Indeed, during the 1960s and 1970s, the Fed believed it could lower unemployment through higher inflation, and vice-versa. As such, it pursued a “stop-and-go” monetary policy, alternating between fighting high unemployment and high inflation. During the “go” periods, the Fed would lower interest rates to loosen the money supply and target lower unemployment. During the “stop” periods, when inflation mounted, the Fed would raise interest rates to reduce inflationary pressure. However, the trade-off proved unstable in the long-run, as inflation and unemployment increased together in the mid-1970s. While unemployment trended down slightly by the end of the decade, inflation continued to rise, reaching almost 11% mid-1979 (2) .
Paul Volcker (1927-2019) was an American economist who served as the 12th chairman of the Federal Reserve from 1979 to 1987. During his tenure as chairman, Volcker was widely credited with having ended the high levels of inflation seen in the United States throughout the 1970s and early 1980s. He previously served as the president of the Federal Reserve Bank of New York from 1975 to 1979.
US- Inflation rate in %, CPI
US - Policy rate in %
10 12 16 14
25
20
15
10
2 4 8
5
0
1970
1973
1976
1979
1982
1985
1970
1973
1976
1979
1982
1985
Source: Macrobond, Rothschild & Co Asset Management Europe, March 2023
Source: Macrobond, Rothschild & Co Asset Management Europe, March 2023
(2) Source: World Bank, March 2023.
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