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Americans today must realize that efforts to rein in runaway inflation, while necessary, have real and potentially damaging consequences. Much.
There was a time not long ago when:
- A small army of farmers, protesting foreclosures due to high interest rates, drove to Washington, DC, on tractors to protest at the Federal Reserve.
- Car dealers sent to the Fed coffins full of car keys from unsold vehicles to represent the death of sales, because people could no longer afford to borrow money to buy cars.
- builders 2×4 lumber mailed pieces to the chairman of the Federal Reserve to remind him that his effort to control inflation was suffocating the construction industry.
The rich but largely forgotten history of people protesting high interest rates at the Federal Reserve seems crazy today, when Americans are so used to such easy access to borrowed money.
We’re talking about the late ’70s and early ’80s here, when high inflation became so ingrained in the American psyche that killing it caused a shock to the system, leading to daily interest rates on par with what the credit cards today.
The medicine to cure inflation started a double-dip recession, in which a recession was followed by a brief recovery and then another recession, putting millions of Americans out of work.
The architect of that shock, the former chairman of the Federal Reserve Paul Volckeris hailed today for doing the politically difficult and setting the stage for decades of subsequent economic growth.
But he withstood criticism when inflation subsided.
The chairman who put Volcker at the helm of the Fed, Jimmy Carter, lost his job amid a crisis of confidence and voter unrest. Ronald Reagan would reappoint Volcker to a second four-year term before the two fell out.
Volcker shock. People this week are remembering the “Volcker shock”, which altered the course of the US economy back then, as the Federal Reserve today imposes its second massive rate hike in a row.
Read these CNN Business articles for the full story on Wednesday’s walk:
Now back to Volcker.
Mortgage rates skyrocketed. Let’s look at 30-year fixed mortgage ratesthat remain close to the rates that the Fed controls.
The 30-year average fixed rate was already excessive, approaching 12% in October 1979, even before Volcker’s declaration. dramatic ad of drastic anti-inflationary measures. In a few months the average rate it had ballooned to more than 16%. The average 30-year fixed mortgage rate was more than 18%, its meteoric high, in October 1981.
Today we are still A far cry from those 80’s highs; 30-year fixed rates have nearly doubled in one year to almost 6%.
Volcker’s legacy is imposing. Every story you read about Volcker will mention that he was tall, at 6 feet 7 inches. But he has an outsized legacy to match.
In addition to administering the harsh medicine that put an end to runaway inflation in the 1970s, he is credited with the “Volcker rule,” which for a time prevented banks from trading their own assets.
Chris Isidoro wrote CNN obituary for Volcker in 2019. I asked how Volcker would view the current fight against inflation.
He made these important points:
Volcker was willing to make tough decisions. Volcker believed that the Fed had to do whatever it took to get prices back in line. Under his leadership, the central bank raised its benchmark rate to 19% in January 1981.
There were consequences. His high interest rate policy caused not one, but two recessions in a short time: one in January 1980 that lasted until July 1980, which was shortly followed by a recession that began in July 1981 and lasted until November from 1982.
In November 1982, the unemployment rate reached 10.8%, almost a percentage point higher than it was after the Great Recession 12 years ago.
It was much worse inflation than we have today. Volcker had far more serious inflationary pressures to combat, with the rate of increase in the consumer price index peaking at 14.8% in March 1980, well above the current rate of 8.3%.
Volcker faced a spiral of wages and prices. Far more workers had union contracts than today, and many of those contracts had built-in cost-of-living adjustment, or COLA, clauses that automatically increased wages when prices rose. That is not the case today.
Today the Fed has less control. Many of the factors behind the current high inflation are outside the Fed’s control, including increases in oil and food prices caused by the war in Ukraine and supply chain problems caused by the pandemic. of Covid-19, which still raise the cost of production of many products and causing shortages in the face of strong demand.
Much of the Federal Reserve’s job in controlling inflation is convincing people that inflation has been controlled, according to former Federal Reserve official David Wilcox, who is now a senior fellow at the Peterson Institute for International Economics.
Just before this latest rate hike, he wrote an opinion piece for CNN Businessin which he offered two paths to the US:
The optimistic view is that people believe that inflation is under control. “If households and businesses hold the view that inflation will return to 2% in the not-too-distant future, the Fed’s task in achieving that outcome will be much easier,” Wilcox wrote.
The pessimistic view is that people think it is here to stay. “The experience of price escalation at the gas station and grocery store over the past year may have conditioned households and businesses to expect more of the same,” Wilcox wrote. “In that case, the Fed will need to raise its policy rate much more, and the looming economic downturn will be much deeper.”
Wilcox argued that Volcker was trying to shake Americans out of the general acceptance of inflation being too high. Today, Wilcox sounds optimistic, predicting inflation to be lower a year from now and in the target neighborhood of 2% in two to three years, though who knows what will happen with the pandemic and the war in Ukraine.
Wilcox refers to Volcker as “the patron saint of inflation control” and notes that current Fed Chairman Jerome Powell often invokes Volcker’s name.
It is usually in glowing terms. This spring, Powell praised Volcker for fighting on two fronts, “slaying, as he called it, the ‘inflationary dragon’ and dismantling the public belief that high inflation was an unfortunate but immutable fact of life.”
Let us hope that this is not the case and that these interest rate hikes do not have the same unintended consequences that Volcker had more than 40 years ago.