Volcker vs Powell — how the US Fed once handled low inflation

Inflation peaked in March 1980. Wage growth peaked in January 1981. Both fell sharply over the next five years, though interest rates were slower to come downFormer US Federal Reserve chief Paul Volcker at the US Embassy in London, UK, July 16 1971. Picture: PIERRE MANEVY/DAILY EXPRESS/GETTY IMAGES/MATT GREEN

Volcker, whose height of 200cm made him a towering presence in more ways than one, took the Fed’s helm in 1979 and immediately began tightening monetary policy to the most restrictive levels of the post-war era. The benchmark federal funds rate — the level at which banks borrow cash reserves from each other overnight — rose as high as 20% in 1980 and 1981.

The jobless rate peaked at 10.8% in November and December of 1982, the highest since the Great Depression. And while unemployment averaged about 5.1% in the roughly three-decade period between the end of the Second World War and the Volcker shock, it has been about 6.2% on average in the four decades since.Unionisation rates have also been on a steady decline since Volcker.

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