Volcker’s Lesson for Today’s Fed: Don’t Pivot

In the estimation of some economic observers, today’s Federal Reserve should heed the wisdom of Paul Volcker, who led the Federal Reserve during the last great bout of inflation. That is, don’t waver in the fight against spiraling prices, even in the face of an economic downturn—as that stance, argued PIMCO’s Tony Crescenzi in a recent post, is why Volcker was successful. In today’s Wall Street argot, Volcker didn’t “pivot.”

Volcker, during his turbulent tour as Federal Reserve chair (1979 to 1987), is viewed by many as the economic savior who defeated debilitating double-digit inflation. This was an exercise in tough love, to say the least. His relentless push to raise interest rates touched off two recessions.

But a key part of his success was that he didn’t back down from his campaign—and killed off the prevalent public notion that more inflation was inevitable, Crescenzi argued in a post on LinkedIn.

Crescenzi, a strategist for the asset manager and its executive vice president, castigated the current hope of many in the financial world that the Fed, now embarked on a steady program to elevate interest rates, will reverse course. That is, pivot.

Volcker’s example “should cast doubt on any notion of a quick about-face in Fed policy that results in rate cuts in 2023,” Crescenzi wrote. Volcker, he added, “understood the importance of inflation psychology and of combating the public’s perceptions about high inflation with bold action.”

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To Crescenzi, the current Fed head, Jerome Powell, is in Volcker’s unrelenting mold. “Powell is almost certainly aware of the lessons that Volcker provided, in particular the importance of taking actions that constrain the pervasive influence of unstable inflation expectations,” Crescenzi opined.

In Crescenzi’s view, the Powell Fed’s plan for next year involves attaining a “positive real federal funds rate,” meaning the central bank’s benchmark rate will exceed inflation. Right now, it is some 6 percentage points below the Consumer Price Index.

There are other Volcker-esque tactics the Fed should follow, he declared. One is “hesitance to lower the funds rate when the inflation rate declines.” Another is not returning to bond buying.

Some have criticized the Powell Fed for not moving sooner to tackle inflation, now running at 8.5%. But to make up for lost time, Powell is taking advantage of a gift Volcker gave him: faith in the Fed. People now believe that the Fed can and should conquer high inflation, the PIMCO executive noted.

Quoting Volcker, who died in 2019, Crescenzi wrote: “Vacillation and procrastination, out of fears of recession or otherwise, would run grave risks.”