Former Federal Reserve Chairman Paul A. Volcker, who died over the weekend at 92, was a towering figure both in stature (he was 6 foot, 7 inches tall) and in his role in American life: He broke the back of inflation for at least a generation, maybe two.
He was also, in my view, the last Fed chairman who accepted the need to inflict heavy short-term pain on American voters and the economy to reap longer-term rewards, which turned out to be two decades of prosperity, economic growth, and stock market riches. Under his watch, bonds began a rally that has lasted nearly 40 years.
Volcker was notoriously taciturn. In those days, Fed chairmen didn’t give news conferences and were opaque about their activities. A cottage industry of “Fed watchers” had to glean what the central bank was doing from what happened in money markets or, as I’ve liked to joke, by watching which way the ashes fell from Volcker’s signature cigars.
Yet his actions spoke much more loudly. When President Jimmy Carter appointed him in August 1979, the consumer-price index was rising at nearly a 12% annual clip. He promptly engineered a rise in the federal-funds rate to 15.9% by the November 1980 presidential election and an all-time peak of 19.1% in June 1981. That triggered two recessions—in 1980 and 1981-1982—but it deprived inflation of the oxygen it needed. By December 1982, the CPI was growing by less than 4% annually, a third the pace at which it was rising when Volcker took the job.
The bond market began its rally in September 1981, when the 10-year Treasury note peaked at 15.8%, TMUBMUSD10Y, -0.05% and the stock market SPX, -0.32% rally started a year later, in August 1982, after Volcker organized a central bank bailout that prevented Mexico from defaulting on its debt. On Aug. 12, 1982, the Dow Jones Industrial Average DJIA, -0.38% sat at 776.92—that’s not a typo—about where it closed in 1964, after a miserable secular bear market in stocks. Just looking at that number tells us how far we’ve come.
But politicians paid a steep price for Volcker’s tenacity. Jimmy Carter lost the 1980 presidential election as the Volcker-induced recession plus inflation, combined with the Iran hostage crisis, swept Ronald Reagan into the White House in a landslide. President Reagan, too, suffered political fallout from the second recession of the Volcker era: Republicans lost 26 seats in the House of Representatives in the 1982 midterms as unemployment topped 10%.
Reagan was not pleased; he dithered for months over Volcker’s reappointment. According to Volcker’s memoir, in 1984 his chief of staff, James A. Baker III, summoned the Fed chairman to the White House and, while Reagan sat by silently, told Volcker, “The president is ordering you not to raise interest rates before the election.” He wasn’t planning to raise them anyway, he recounted, but I doubt he would have refrained if he thought it necessary.
Volcker’s successors at the Fed have retained the Master’s independence in theory but not, unfortunately, in practice. All of them have been, to one degree or another, slaves of the markets. In a December 1995 speech, Alan Greenspan decried the stock market’s “irrational exuberance.” But the big selloff that followed prompted him to launch what came to be known as the “Greenspan put”—the message to investors and traders that no matter what, the Fed had their back.
Ben Bernanke, Janet Yellen, and Jerome Powell have all reacted in similar ways at different times in their tenure, backing off planned rate hikes when markets sold off. (Whether those hikes were even necessary in a deflationary world is another question.) The last time that happened was last December, when a huge stock selloff forced Powell in effect to acknowledge who was boss. The Fed also has repeatedly bailed out failing financial institutions to “save” the market from crashes and the economy from recessions.
President Bill Clinton’s advisor James Carville once famously joked that if he was reincarnated, he wanted to come back as the bond market. “You could intimidate everybody,” he said ruefully. But bonds have nothing on stocks—and fears of recessions and the political fallout they may bring—in influencing Fed chairmen and women.
Paul Volcker, though, didn’t give a damn what voters, presidents, or Wall Street thought. He did what he thought was right, and we’re all the better for it. The “last of a dying breed” indeed. Rest in peace, Mr. Chairman.
