Lessons from the Volcker disinflation

Standing firm in face of slowing activity was key to Volcker's success

• Volcker’s disinflation represents a seminal moment in post-Bretton Woods policymaking—when monetary policy asserted the primacy of price stability;

• Policymakers will be studying this experience closely for lessons—so what was the key to Volcker’s success?

Volcker’s famous disinflation is by now so distant that few in markets will recall the detail of how this played out at the time.

Fortunately, a paper by Marvin Goodfriend and Robert King, published in 2005 in the Journal of Monetary Economics, provides some useful detail this “incredible Volcker disinflation”—from which the following discussion is liberally drawn (all quotes and excerpts from FOMC transcripts that follow are taken from this article).

Indeed, although Volcker was formally appointed as Chairman on the FOMC in August 1979, Goodfriend and King suggest “the Volcker disinflation did not really start in earnest until late 1980 or early 1981.”

That is, early in his tenure Volcker erred in the fight against inflation as growth cooled—repeating the mistakes from earlier in the decade. This is the mistake that readers of the FT were encouraged to reflect upon earlier this week.

The lead-up

Before turning to Volcker , it is useful to recall the lead up to his tenure as FOMC Chairman in 1979.

As is well known, the 1970s saw a series of shocks that accelerated the headline inflation rate—and after each shock the underlying (core) inflation rate ended up higher than prior to the shock.