Vol. 01 – The Volcker shock
4
US - Unemployment rate in %
US - 10-year sovereign rate in %
11 10
11 13 17 15
3 4 6 5 7 8 9
7 9
5
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
The first attempt proved insufficient… During the December 1979–February 1980 inflation scare, the Fed took actions that raised interest rates substantially. Ultimately, however, these aggressive interest rate policy actions would only serve to contain inflation temporarily. Indeed, when the economy fell into a sharp recession in January 1980, the Volcker Fed behaved in a manner consistent with prior experiences, undertaking restrictive monetary policy in the face of rising inflation, but promptly reversing field to fight the recession as unemployment mounted, an action reminiscent of the “stop-and-go” policies the public had come to expect. By July 1980, the recession was officially over in part due to looser monetary policy, but after all the turbulence, inflation had barely been contained. In this sense, the dramatic high-profile policy actions of the first year of the Volcker era at the Fed looked not too different from previous inflation- fighting episodes. … but the true onset of the Volcker disinflation dates to late 1980 / early 1981 In November 1980, Reagan beat Carter in a landslide. Among other things, the Reagan administration voiced strong support for Fed monetary policy to reduce inflation, especially since the war between
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