Federal Reserve Must Follow Paul Volcker's Approach in Decisively Beating Inflation

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  Federal Reserve Must Follow Paul Volcker's Approach in Decisively Beating Inflation
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Author Topic: Federal Reserve Must Follow Paul Volcker's Approach in Decisively Beating Inflation  (Read 1479 times)
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« on: July 23, 2022, 06:23:04 PM »
« edited: July 23, 2022, 06:37:21 PM by Frodo »

The Fed must emulate the tactics of Volcker’s fight against inflation
Jay Powell mirrors the former Fed chair’s bravery but not his methods

US Federal Reserve chair Jay Powell has expressed deep admiration for Paul Volcker, his legendary predecessor who defeated the high inflation that plagued the US economy from 1965 to 1982.

Then, as now, Volcker was fighting more than a decade of loose monetary policy, combined with supply shocks stemming from geopolitical turmoil. But though he extols the man, Powell is deviating from Volcker’s methods. This is perhaps why inflation continues to accelerate, now topping 9 per cent in the US and spreading rapidly throughout the world.

Volcker kept monetary policy tight through the recessions of 1980 and 1981-82, despite populist revolt, bipartisan demands for his firing, even a public call from the US Treasury secretary to ease money supply, which he famously dismissed as an “unusual communication”. During this time, unemployment rose to double digits, but he held firm until inflation finally fell, from more than 14.8 per cent in 1980 to less than 5 per cent by the end of 1982.

His predecessors had pursued “stop and go” policies, continually raising rates when unemployment was falling and lowering them again when jobless levels rose. This had hurt the Fed’s credibility, whipsawed markets, and further entrenched inflation in the economy. Volcker wisely and bravely refused to revert to that tactic.

Given this history, it would be folly for Powell and the Fed to embrace “stop and go” again today. They should also follow Volcker’s example by restraining money supply. Too much money chasing too few goods and services lies at the heart of this and every other inflationary moment.

And here is the non-paywall version. 

The Smiling Face On Your TV
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« Reply #1 on: August 10, 2022, 12:51:51 PM »

You mean the same Paul Volcker who gleefully cheered as Reagan fired all the air traffic controllers and crushed private sector bargaining power for the fundamental rights the rest of the Western world enjoys (e.g, paid leave, a work week under 40 hours, employee ownership)?

While Volcker correctly understood the Fed must reduce its balance sheet, supply shocks from KSA/other natural resource extractors contributes to the current ongoing inflation (at least in the colloquial definition of waning consumer buying power), I am skeptical a monetarist approach is necessary as overall growth/productivity continues to flourish. After all, the 90s’ deficit hawks owe their entire existence to Volcker’s Quasi-Austrian measures regularly underfunding the federal budget while Ol Ronnie embarked on his Star Wars wild goose chase. In fact, following the Volckerian philosophy of raising the federal funds rate ad nauseam to disincentivize capital investment only creates further barriers to entry, thus enabling those who’ve accumulated capital to further concentrate property ownership.

My contention is we are not experiencing stagflation, but rather should pursue windfall profits taxes and more pricing transparency to force the “invisible hand”. The Inflation Reduction Act’s 15% corporate minimum tax and $35 insulin pricing cap seem like good starts, however these types of moves need to be all-encompassing; To actually recuperate windfall profits, our tax code needs stronger enforcement/OECD reciprocity. The 2nd move risks the various pitfalls we’ve seen from price controls over the years. Look, I work in a competitive construction industry. Every project we have to submit our budget with marked out cost codes/budget lines  to the owners’ specifications, and we might lose out because some other contractor might swoop in with a better offer. The transparency brings out the best in everyone. If we’re okay with insurance companies existing as an administrative middle-man, shouldn’t we demand transparency in pharmaceutical negotiations out of the public interest?

Tl;dr: Yes, we need to shrink the fed’s balance sheet. Yes, rent-seeking behavior continuing to outpace production. However, tightening the belt on aggregate demand via raising interest rates will rival its austere predecessor in forcing the most vulnerable to shoulder the burden. I contend the solution is more post-WWII than Gas Crunch; we need to ensure buying power parity.
Fmr. Pres. Duke
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« Reply #2 on: August 16, 2022, 02:57:04 PM »

You can't have stagflation when the economy is at full employment.

This is an economy almost like nothing we have ever seen before. We have a strong job market, high inflation, shortages galore, yet we have seen two quarters of economic contraction.

I don't think the Fed is going to act as Volker did nor should it. We are already seeing inflation beginning to ease and the housing market come to a grinding halt. I suspect we will see another 75bps rate hike in September and that may be the last of that going forward, absent inflation picking up again.

I also suspect once student loan payments are reinstated, you will see inflation drop further as people will have less disposable income than they did before.
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