Jerome Powell and the FOMC have so far cut US interest rates three times in 2019. Balancing growth and inflationary pressures is never easy, but their meeting is at least contained in the business section of the daily newspapers. Paul Volcker, who held the same position for almost a decade in the 1970s and 80s, held the post during very different times. Volcker’s death on Monday provided a reminder of the dilemmas he faced and how his radical policies catapulted business news to the front page.
Posthumous praise for Volcker, the former head of the US central bank, has focused on his reputation for fighting inflation. Volcker raised the Fed’s benchmark interest rate from 11% to a record 20% by late 1980 in an attempt to slow the economy’s growth and thereby reduce inflation. He was successful on both levels, and the US economy went into two recessions during his time as Fed chair. The long-term consequences of Volcker’s actions were that the Fed’s reputation for independence was secured, and he has also been credited with braving the short-term pain that then created the conditions for long-term growth.
Inflation during the Carter-Regan era peaked in April 1980 when it reached 14.76% but then fell to ‘only’ 6.51% the following April. By December 1989, inflation was down to 4.65% and unemployment was 5.4%. The policies that brought about these changes were introduced via Volcker’s trademark blunt delivery. When explaining to Congress what was needed to tame inflation, he said:
“The standard of living of the average American has to decline. I don’t think you can escape that.”
Volcker’s statements and policies were not efforts to build his personal ‘brand’, but instead were issued to help him navigate the severe challenges that he and the US economy faced. He eschewed the familiar tropes of the banking community and managed to position himself as a Wall Street outsider. Going against the conventional wisdom that ‘financial innovation’ was necessary for a healthy economy, he said:
“The only useful banking innovation was the invention of the ATM.”
Current Bank of England Governor Mark Carney said of Volcker:
“The integrity and independence he showed in his battle against inflation helped lead the United States – and with it, the world – through some of the most testing times of the modern era.”
Having earned his stripes in such a formidable fashion, Volcker remained an influential figure through to the end of his career. He worked with the administration of President Barack Obama to bring in the ‘Volcker Rule’ in 2010. The new law was a reaction to the financial crisis of 2008 – Volcker’s approach being that commercial US banks should not make proprietary investments in risky assets such as hedge funds and private equity firms.
Even Ron Paul, congressman and prominent critic of the Federal Reserve, offered qualified praise of Volcker:
“I met and got to question several Federal Reserve chairmen: Arthur Burns, G. William Miller, and Paul Volcker. Of the three, I had the most interaction with Volcker. He was more personable and smarter than the others, including the more recent board chairmen Alan Greenspan and Ben Bernanke.”
Source: New York Times
Jerome Powell will be aware that his stewardship of the Fed will be compared to Volcker’s when the FOMC convenes this week. Powell’s approach has been less buccaneering than Volcker’s, but that fits in well with the economy requiring regular medication rather than invasive surgery. 2019 has seen the Fed cut rates three times, which is a notable shift in approach considering that it started the year still on a course of tightening monetary policy.
US Fed Funds Rate
Powell therefore ticks the box in terms of ‘being right’ as the easing cycle has seen GDP growth in the second half of the year stabilise near 2%.
US GDP Growth Rate
At the same time, inflation targets are also being hit. Again, the most pleasing aspect of the data, as far as Powell is concerned, is the reduced volatility in the data. The last six data points have seen inflation recorded at being held within a tight range of 1.6-1.8%.
US Inflation Rate
The second Volcker-esque yardstick to measure Powell against would be his ability to secure the Fed’s independence. In his own, more understated way, Powell has also gained plaudits in this area. This in the face of unprecedented pressure from President Donald Trump, with the White House endlessly looking to cajole the Fed into a much looser policy than the one it adopted. Powell has instead insisted that the Fed “will act as appropriate”. The guidance offered consistently refers to policy being based on the performance of the economy rather than the wish list of the president.
A further sign that things are under control is provided by the markets showing 99.3% certainty that they know what this week’s FOMC meeting will decide to do with rates. Markets love certainty and the CME FedWatch tool reports only a 0.7% probability that rates will move from their current level. The US jobs data released on Friday exceeded analyst forecasts, which puts the economy in a good position to deal with the geopolitical risks that cast a shadow over 2020.
Powell is operating in a significantly different economic climate from the one that Volcker knew. Powell’s unremarkable but ‘appropriate’ approach makes it unlikely that he will be remembered in 40 years’ time. Given the ‘noise’ that he is having to block out, Powell may well be content that the ‘numbers’ are held on record, even if he is not.