Powell Vs Volcker: How different is the economic landscape today compared to the 1980s?

Paul Volcker became the Fed chairman in August 1979. Under Jimmy Carter and Ronald Reagan, the Fed’s chief, Paul Volcker, implemented significant monetary tightening in the early 1980s, causing the United States to enter a recession while driving inflation to historically low levels.

Volcker’s most significant contribution was his ability to control inflation in the early 1980s. By increasing the Fed funds rate to above 19%, Volcker was able to lower the US CPI from above 14% and start the current phase of declining bond yields and prices. In August 1987, he resigned from the Fed, and Alan Greenspan took his place. Greenspan oversaw the Fed during the market crash of October 1987, which was followed by one of the biggest bull markets in history.

Today, Fed chief Powell is fighting a similar battle – to tame inflation and not to hurt the economy while bringing inflation down. Although inflation is the common enemy, the economic environment during the regime of Volcker differs a lot from what Powell is facing today.

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José Torres, Senior Economist at Interactive Brokers says, “Volcker’s monetary policy tightening took four years to bring inflation below 4%, and it contributed to two recessions, high unemployment, and a spike in financial-market volatility. Those dire consequences occurred despite disinflationary tailwinds of monopolies being dissolved and manufacturers aggressively offshoring production to lower labour-cost markets.

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Today, neither of those tailwinds exists, making it more difficult for Fed Chairman Jerome Powell and the rest of the central bank to fight inflation.

Today’s Federal Reserve is fighting inflation without the benefits of the large-scale breaking up of monopolies and a wave of deregulation that would spur competition to combat price increases. Furthermore, and perhaps more significantly, the trend of offshoring has reversed, supporting tight labour market conditions and wage pressures.”

Paul Volcker will be remembered as the inflation slayer, and Ben Bernanke ( Fed Chief till 2014) as the crisis firefighter. Jerome Powell is in danger of having to play both roles at the same time — or, worse, having to choose between them.