boglerdude wrote: ↑Wed Oct 21, 2020 9:44 pm
What mechanism did he use to raise rates
Paul A. Volcker, Fed chairman who curbed inflation by raising interest rates, dies at 92
https://www.washingtonpost.com/local/ob ... story.html
Putting brakes on inflation
In 1979, when President Jimmy Carter was looking for a new Fed chairman, prices were spiraling upward, almost out of control.
A vicious cycle was underway: Because prices had been rising rapidly in the recent past, workers demanded ever-higher wages.
As the nation’s central bank, the Federal Reserve was the agency best positioned to try to end that demoralizing cycle, but it would exact a cost.
To reduce inflation, the Fed would need to raise interest rates to choke off the flow of money into the economy, probably prompting much higher unemployment. For that reason, the previous two men in the job, Arthur F. Burns and G. William Miller, had moved only timidly in trying to combat inflation. Miller left the job after a single ineffective year as Fed chair.
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As Carter and his aides spoke with people in financial circles about potential nominees, Mr. Volcker’s name came up repeatedly. The president appointed Mr. Volcker, a decision that had been judged well by history but may well have cost Carter reelection in 1980.
Taking the job came at a personal cost for Mr. Volcker. He would have to take a 50 percent pay cut from his salary as New York Fed president, and his wife had to return to bookkeeping work to afford both their New York co-op and the small Foggy Bottom apartment. Mr. Volcker commuted back to New York on the weekends.
Just two months after taking office, Mr. Volcker was ready to make the boldest move of his tenure. He called his Fed colleagues from across the country to Washington for a secret, emergency policy meeting on a Saturday. After hours of argument and debate, he steered the Federal Open Market Committee to change the entire framework the Fed would use to control the nation’s money supply.
The Fed then, and now, set a target for short-term interest rates and then bought and sold securities to ensure that interest rates actually settled at that level. When the Fed wants to slow the economy and choke off inflation, it raises its interest rate target. Mr. Volcker concluded in October 1979 that the Fed needed to change strategies and start targeting the actual amount of money floating around in the economy.
Angry reaction
The media called it the “Saturday Night Special,” and it most certainly put a bullet in the U.S. economy. The unemployment rate that month was 6 percent. By the time Mr. Volcker’s campaign of monetary tightening was done, in 1982, joblessness would peak at 10.8 percent.
This, understandably, led to intense pressure on Mr. Volcker and the Fed to relent, to hold off on the tight-money policies that had caused the deepest recession since World War II.
With interest rates over 20 percent, home-building activity practically came to a halt. People who worked in construction trades mailed two-by-four pieces of lumber to Mr. Volcker in protest. Auto dealers mailed keys to the cars for which there were no buyers. Farmers drove their tractors around the white marble Fed building.
A man with a sawed-off shotgun and other weapons, who later told police he was angry about high interest rates, charged past guards at the Fed’s building and nearly made it to the boardroom of the central bank before a guard tackled him. (After the incident, Mr. Volcker was assigned a full-time security detail for the first time.)
Mr. Volcker’s routine appearances on Capitol Hill became an exercise in lawmakers of both parties attacking him. The economic downturn caused by Mr. Volcker’s tight-money policies was surely a significant factor in former California governor Ronald Reagan’s landslide victory over Carter in the 1980 presidential election. Both Reagan and Carter expressed public support for the policies, even as many of their aides assailed them behind the scenes.
But Mr. Volcker, confident in his analysis that this was the only way to rid the nation of double-digit inflation for good, ignored the calls. It was successful: Inflation was about 12 percent over the 12 months before Mr. Volcker became Fed chairman. By 1986, it was down to around 2 percent.
Once that vicious cycle of out-of-control inflation expectations was ended, Mr. Volcker relented and cut rates, unleashing an economic boom that would continue with few interruptions for more than a quarter century.