By Steve Morelli
October 18, 2018
He might look like an amiable guy, but Paul
Volcker went full beast mode on inflation when he was the Fed chairman in the
1980s.
President Donald
Trump might call The Fed his biggest threat, but the central bank is likely to
turn up the heat another notch, according to minutes of its most recent meeting
released Wednesday.
Presidents have
long had a tangled relationship with The Fed and its chairman, not exactly to
the extent that Trump has called out Chairman Jerome Powell. Trump has
expressed regret at naming Powell as the Fed chief, saying he was disappointed.
Last week, when
asked if trade policy was hip-checking the stock markets, Trump blamed the Fed
for recent instability, saying “the Fed has gone crazy.”
The apparently
nutty thing the Fed did was raise interest rates three times this year, the
latest bumping the rate a quarter point from 2 to 2.25 percent in late
September. If the president disliked that, he must have hated the Fed’s statement.
“The Committee
expects that further gradual increases in the target range for the federal
funds rate will be consistent with sustained expansion of economic activity,
strong labor market conditions, and inflation near the Committee’s symmetric 2
percent objective,” according to the statement.
So, things look
healthy enough to raise the rate and temper any overheating. Trump is correct,
in a sense, that the Fed thinks the economy looks too good.
“Information
received since the Federal Open Market Committee met in August indicates that
the labor market has continued to strengthen and that economic activity has
been rising at a strong rate,” the release said. “Job gains have been strong,
on average, in recent months, and the unemployment rate has stayed low.
Household spending and business fixed investment have grown strongly.”
Not exactly crazy
talk, but a banker’s way of saying, “Whoa, Nelly.”
Presidents can be
made or broken by the Fed. A clear case of that was when President Jimmy Carter
named Paul Volcker as Fed chairman in the summer of 1979, just as the prime
mortgage rate hit double digits.
Inflation had been
building since the 1960s and was boiling over by the time Volcker took office.
He quickly turned up the heat, raising rates deep into double-digit territory.
The prime lending
rate went up from about 11 percent in 1979 to 20 percent in 1981. The effect
was to tighten the money supply and choke off inflation, but consumers and
businesses were the ones suffocating.
Factories had
trouble borrowing investing capital, helping send the unemployment rate on the
road to 10 percent. And homebuyers had to contend with mortgage rates into the
double-digits, eventually hitting the high teens.
Those factors ran
the economy into a recession in 1980, just as Carter was attempting to run for
a second term. The economic pain was enough to open the door for Ronald Reagan,
who previously had difficulty getting traction for his presidential bid.
Even with President
Reagan in office, Volcker kept turning up the prime rate, to a high of 20 percent in
April 1981.
The inflation rate
kept growing after Reagan became president, but not for long. Just as Iran had
released the American hostages the day Reagan took the oath, inflation loosened
its grip two months later in March with a high of 14.8 percent.
The fever broke and
inflation plummeted to below 3 percent in 1983, helping make Reagan a hero.
But it was not easy
for Volcker during that period, with legislators and others calling for his
resignation. Reagan, however, refused to comment.
Steven A. Morelli is editor-in-chief for AdvisorNews. He has
more than 25 years of experience as a reporter and editor for newspapers and
magazines. He was also vice president of communications for an insurance
agents’ association. Steve can be reached at smorelli@adnewsfeedback.com.
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