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Paul Volcker and the 1979–82 inflation fight
Fed chair 1979–1987· Economist or figure
Fact, law or dataA rule, statute, definition or measured number.
Fed chair from 1979 to 1987 who broke double-digit inflation with record interest rates and two recessions.
See it on the Money & Finance map →How it works
Appointed by President Carter in August 1979 with inflation above 11%, Volcker changed tactics on October 6, 1979: the Fed would target the growth of money and bank reserves and let interest rates go wherever that led. The fed funds rate reached about 20% in 1980–81 and 30-year mortgage rates about 18%. Two recessions followed, and unemployment hit 10.8% in late 1982. Inflation fell to about 3–4% by 1983.
Why it matters
He showed a central bank could break entrenched inflation and restored the Fed's credibility, setting up four decades of falling rates that lifted bond, stock and property values.
Legacy
FOMC transcripts, his memoir Keeping At It (2018), and price and rate data. Builders mailed him two-by-fours and farmers drove tractors to the Fed in protest. The 2010 'Volcker Rule' bears his name.
Debates and risks
How much credit goes to the money targets themselves versus sheer high rates and President Reagan's political backing is debated; strict targeting was dropped in 1982.
Connections (3)
▸Paul Volcker and the 1979–82 inflation fight ended The Great Inflation and 1970s stagflationMainstream view
The connection
Volcker made fighting inflation the Fed's first job. Targeting money growth instead of rates let the federal funds rate climb near 20%, causing two recessions. The pain broke expectations that prices would keep rising: CPI inflation fell from 14.8% in March 1980 to about 3% by 1983.
When and why
Federal Reserve, Washington, from the October 6, 1979 'Saturday night special' meeting through 1982.
How solid is the link?
FOMC transcripts, BLS inflation data and Volcker's memoir 'Keeping At It' (2018); most economists credit the Fed's resolve.
Debates and risks
How much credit goes to Volcker versus falling oil prices and Reagan's political cover, and whether a gentler path existed, is debated.
▸Paul Volcker and the 1979–82 inflation fight squeezed lenders, contributing to Savings and loan crisis (1980s–90s)Mainstream view
The connection
Thrifts held 30-year mortgages paying 6–8% but had to pay depositors market rates once Volcker's tightening pushed short rates to 15–20%. Each month their deposits cost more than their old loans earned, so by 1981–82 most thrifts were losing money and many were insolvent on a market-value basis.
When and why
The US thrift industry, 1979–1982; FDIC historians report that most thrifts lost money in 1981 and 1982.
How solid is the link?
The FDIC's 'History of the Eighties' and Federal Home Loan Bank Board data show negative margins and losses tracking the rate spike.
Debates and risks
High rates exposed a mismatch that deposit-rate caps and fixed-rate lending had built in; bigger losses came later from deregulation and risky bets, so blame is shared.
▸Monetarism and Milton Friedman inspired the 1979 money targets of Paul Volcker and the 1979–82 inflation fightFact, law or data
The connection
Friedman argued inflation comes from too much money, so the Fed should control the money supply. Volcker adopted a version on October 6, 1979: target growth of money and bank reserves and let rates float. Rates soared and inflation broke, but the strict targets were dropped in 1982.
When and why
Special FOMC meeting on Saturday, October 6, 1979, in Washington; Friedman's ideas had spread through the 1960s and 1970s.
How we know
FOMC transcripts and Volcker's own accounts; historians note the money targets also gave political cover for very high rates.
Debates and risks
Friedman said the Fed never truly followed his rules; whether 1979–82 proved or disproved monetarism is still argued.