had a tight and booming labor market in March 2022-and still does. To put that last number in perspective, the number of new jobs needed to hold the unemployment rate steady is probably around 75,000-100,000 per month. But when it finally started raising interest rates, in March 2022, the unemployment rate was at a historic low of 3.6%, and recent rates of payroll job creation were above 500,000 per month. The Fed under Powell came late to the fight against inflation, for which it has been justifiably criticized. That wasn’t so bad, perhaps but by May 1980, after the short but sharp recession of 1980, it was up to 7.5%. In August 1979, at the start of Volcker’s tenure, the US unemployment rate was 6%. Third, consider the different macroeconomic conditions under which Powell and Volcker embarked on their disinflation campaigns. At least for now, Powell doesn’t face that problem.īreaking news: Fed predicts tepid economic growth in 2023 and rising unemployment due to higher interest rates Difference in unemployment Once they rise to high levels, as they had for Volcker in 1979, it can be hard to bring them down. This matters a lot, because inflation expectations tend to become embedded in wage settlements, interest rates, and household and business plans. But over a five- or 10-year horizon, the numbers cluster in the 2-3% range. Of course, expected inflation is higher than 2% in the near term, because people can see that inflation is running higher right now. In fact, they are nearly consistent with the Fed’s 2% inflation target for the personal-consumption expenditures Price Index (PCE). Inflation expectations today are remarkably well contained. That brings us to the second big difference. Surveys showed that people expected 8% to 10% inflation to persist for years. High inflation had become deeply ingrained in Americans’ business plans and popular psychology. As he settled into his new office, the headline inflation rate was a stunning 11.8%, having been above 5% since April 1973 and over 8% since September 1978. had already experienced nearly 15 years of high inflation. In contrast, when Volcker took the reins at the Fed in August 1979, the U.S. In February 2021, the 12-month CPI inflation rate was still a mere 1.7%, but by that May it had reached 5%. is relatively recent, dating only from the spring of 2021. Let’s start with an obvious but much-ignored fact. Inflation was much higher and much more ingrained when Paul Volcker headed the Fed than it is now under Jerome Powell. And, as in the 1970s and early 1980s, the economy has been buffeted by a series of adverse supply shocks to food and energy prices.īut comparing current Fed Chair Jerome Powell’s task to Volcker’s reveals that the differences are greater than the similarities-and all of them make Powell’s job relatively easier. The public has been greatly distressed by rising prices, as it was back then, making inflation the number one economic problem. inflation over the last 18 months or so has been the highest since the Volcker era. News: Fed hikes interest rate by half percentage point - benchmark rate seen topping out at 5.25% The implication (if you buy the parallel) is that bringing inflation to heel will require much higher interest rates, a lot of pain, and probably a deep recession. Case in point: Many observers of the Federal Reserve’s current policy predicament-which is similar to the predicament facing other central banks around the world-have drawn parallels to the problems that Chair Paul Volcker and the Fed faced in the early 1980s.
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