To understand the thinking of the Fed, it helps to get inside the mind of its chairman, Jay Powell.
In his role as central bank chief, he has made no secret of his admiration for Paul Volcker, whose name is virtually synonymous with fighting inflation at all costs, even if it plunges the economy into a recession, as Volcker’s Fed did it – twice – in the early 1980s.
Powell, in his now notoriously blunt speech in Jackson Hole last month, seemed to fully embody his predecessor when he declared that “we have to keep going until the job is done” – (“that”, being increases in rate and “the job” being It was an explicit reference, like it or not, to the ideology of Volcker, whose 2018 autobiography is titled “Keeping At It.”
During congressional testimony in the spring, Powell said of his hero, “I think he was one of the great civil servants of the day – the greatest economic civil servant of the day.”
Part of the reason Volcker is so well remembered is that it took a shrewd mind and an iron stomach to even confront the problem of runaway inflation and then implement the painful shock therapy of hikes. interest rates that cost millions their jobs. Volcker’s plan worked, but it wasn’t easy. There was indeed some pain, in modern Fed parlance.
Powell faces a similar conundrum. Inflation is the highest since Volcker led the Fed, and the central bank itself is facing a credibility crisis after failing to act quickly enough to contain rising prices.
Credibility was also a big concern for Volcker.
“Volcker’s mantra, one he repeated to me again and again throughout 2008-09, was that in a crisis, the only asset you have is your credibility.” Austan Goolsbeean economist who advised the Obama administration, wrote in 2019 just after Volcker died at age 92.
If Powell continues to dip into Volcker’s playbook, it’s safe to assume that his hawkish leadership is here to stay until inflation comes down to the Fed’s 2% target rate.