Feb. 18, 2022

The Man Who Fought Inflation...And Won!

There is a ghost haunting the halls of the Eccles Building, the headquarters of the Federal Reserve. The ghost is that of Paul Adolph Volcker Jr., the 12 Chairman of the Federal Reserve.

And he serve as Chairman of the Fed from 1979 until 1987, a time that was eerily similar to today. Appointed during the closing days of the Jimmy Carter Administration. It was also a time of high inflation and stagnant economic growth.

As the years have passed Volcker has become a nearly mythic figure. Guiding the nation's financial markets in ways that are unimaginable today.

Imagine interest rates that were a hundred times higher, than they are today. That's exactly what Volcker.

That's right, the Fed under Chairman Volcker raised the Federal Funds interest rate to 20%. Roughly 100 times higher than today.

And it was painful. Wow, it was painful!

I remember paying 13% interest on my home mortgage. Laws had to be quickly enacted to cap the interest on an average credit card. As banks and lenders were sending rates skyward.

Eventually, most states agree to a maximum 21% interest rate for credit cards, and other consumer credit. But that was still a burden for those who bought on credit.

Volcker quickly became the most unpopular Fed Chairman in history. As the fed raised rates and tightened the screws on inflation, the economy also began to slow. Unemployment climbed to 10%.

Politicians called for Volcker's resignations. And farmers drove their tractors to Washington to blockade the Eccles Building.

But through it, all Volcker persevered. He stayed on course, in spite of the criticism. And in time inflation began to subside. After peaking at 14.8% shortly after Volcker assumed the role of Chairman. In just 3 years inflation declined to just 3%.

And for 38 years, except for a brief spike in 1990, inflation remained under 4%. 38 years of low inflation. That's more than a lifetime in the financial world.

Thirty-eight years of sustained financial growth, unencumbered by inflation.

Brought to you be a man who would not be taken off course by the screaming mob, demanding his head.

In short, Volcker was able to provide the financial foundation that has supported this economy up until this past year.

Unfortunately over the last 13 months, the old flames of inflation have been fanned again.

An ideolog has risen to the Presidency. One whose policies have driven the price of oil, gas, and energy precipitously higher. A President who has seen food prices spike. And the economy continues to endure those ongoing supply chain troubles.

Unfortunately, instead of a Volcker at the Federal Reserve.  Today's members, and especially its Chairman, seem more inclined to follow public opinion rather than to lead it.

Earlier this week when St Louis President James Bullard suggests that the fed should raise interest rates by 1%. The Markets immediately swoon.

Unfortunately instead of standing tall. Today's Fed folded like a cheap suit. Marker action was enough for the Fed to run for cover. They promptly retracted any sentiment of dramatically raising interest rates. It was all too “radical” a suggestion.

Imagine raising interest rates to fight inflation.

As the Fed folded, the market rallied in support. Showing that Wall Street has little appetite for a real fight against inflation.

One may assume, I believe,  that any further interest rate hikes will be mild. Which means essentially meaningless. And totally ineffective in the real fight against inflation.

Wouldn't it be great if the Fed would read its own history?

To learn about a Chairman from a long time ago?

By the name of Paul Volcker. The last man to win the fight against inflation.