To understand the Fed’s thinking, it helps to get inside the mind of its chairman, Jay Powell.
In his role as the central bank chief, he’s made no secret of his admiration for Paul Volcker, whose name is practically synonymous with fighting inflation at all costs, even if it crashes the economy into a recession, as Volcker’s Fed did — twice — in the early 1980s.
Powell, in his now notoriously blunt Jackson Hole speech last month, appeared to fully embody his predecessor when he declared that “we must keep at it until the job is done” — (“it,” being rate hikes and “the job” being tamping down inflation.) That was an explicit reference, whether he intended it or not, to the ideology of Volcker, whose 2018 autobiography is titled “Keeping At It.”
During congressional testimony in the spring, Powell said of his hero: “I think he was one of the great public servants of the era — the greatest economic public servant of the era.”
Part of the reason Volcker is remembered so favorably is because it took a savvy mind and an iron stomach to even confront the problem of rampant inflation, and then implement the painful shock therapy of interest rate hikes that cost millions of people their jobs. Volcker’s plan worked, but it wasn’t easy. There was indeed some pain, in modern Fed parlance.
Powell faces a similar conundrum. Inflation is the highest it’s been since Volcker ran the Fed, and the central bank itself is facing a crisis of credibility after not moving fast enough to keep rising prices in check.
Credibility was a big concern for Volcker as well.
“Volcker’s mantra, one he told me again and again through 2008-9, was that in a crisis the only asset you have is your credibility,” Austan Goolsbee, an economist who advised the Obama administration, wrote in 2019 just after Volcker died at age 92.
If Powell continues to draw from the Volcker playbook, it’s safe to assume his hawkish leadership is here to stay until inflation gets down to the Fed’s target rate of 2%.