When I read the current reports about easing inflationary pressures, my mind goes back to an interview I had as an economics correspondent while working in the Washington bureau of the Chicago Tribune.

Bill Neikirk, a classy man and a great colleague, had invited me to sit in on a rare interview with Paul Volcker, then the chairman of the Federal Reserve Board. I can still see Volcker sitting at his desk twirling an unlit cigar in his hand. He was a gruff man who didn’t smile much and the comments he made that day give me pause about current headlines that herald easing inflation.

*Federal Reserve Chairman Paul Volcker reading the financial page as he waits for a hearing in 1980. (James K. W. Atherton/The Washington Post)*

The interview was off the record, probably a reason that Volcker spoke so candidly. But he and Neikirk have passed away, and I think neither would object to this report on our conversation. Volcker’s remarks expose just how precarious a tightrope leaders like Jay Powell, the current Fed chair, walk when trying to tame inflation, considered by many analysts to be the number one problem for most Americans.

When we had the interview, it was a few years after Volcker had assumed the Fed chair in 1979. He had launched aggressive policies that spawned two back to back recessions that sent interest rates soaring beyond twenty percent. The economy plunged. Unemployment reached 10.8 percent. Neikirk asked the Fed chairman if he knew how much economic carnage his policies would cause when he staged the “Saturday Night Special” — a highly unusual October 6, 1979 night press conference unveiling changes in monetary policy designed to break the back of inflation.

Although I didn’t keep the exact words to his response, I vividly remember what he said because it shocked me. He said he had no idea things would get that bad when he launched the changes. He didn’t say he was about to back off, and he expressed a steely resolve to win his war against inflation, which then stood at twelve percent.

Volcker’s candid response shows that no one can really predict the consequences when you start tinkering with an economy as powerful as America’s. Anything can happen, particularly once you factor in the potential geopolitical gyrations that the world faced then and now.

Jay Powell has embarked on the same path to restore price stability to the economy. Like Volcker, he is using the tools of the nation’s central bank to raise interest rates aggressively. In some respects, both men decided to confront similar challenges. Disruptive political forces outside of the Fed’s control made the job harder.

Volcker wrestled with a surge of pent-up demand for goods and services unleashed when President Nixon ended the nation’s disastrous experiment with wage and price controls. It took years for those forces to dissipate because the idea of inevitable prices hikes got baked into the psyche of many Americans, a fate that Powell hopes the nation doesn’t replicate.

Rising prices for gasoline also heightened the challenges for both men. Volcker had to wrestle the an oil embargo imposed by OPEC nations dominated by Middle Eastern powers angered by Israel’s victory in the Yom Kipper war. The rising price of gasoline soared when Middle East potentates imposed an embargo.

Powell’s job is complicated by other factors, too. The pandemic and the Fed’s response helped save the country from a long and deep recession but also played a leading role in soaring prices. Current gasoline prices rose sharply thanks to the war in Ukraine. Then there are supply chain problems that plague the Fed.

But the situations differ significantly, too. When Volcker staged the “Saturday Night Special,” the Fed’s discount rate, a key measure that bankers use to set the interest rates we all pay, stood at 11.77 percent. Inflation was twelve percent and unemployment six percent. By contrast, the discount rate now is 2.5 percent; inflation stands at 8.5 percent and unemployment is at a fifty year low of 3.5 percent.

Of course, other factors also influenced events for both Volcker and Powell. But it’s clear that Volcker faced a more dire situation that the one that confronts Powell and the nation’s central bank. I think we can expect more gyrations if the economic numbers in future months. As Volcker learned, changes in policies can have unintended consequences that even the most astute analysts can’t foresee. And despite the recent report that suggest inflation is easing, the Fed’s challenges are far from over.

One lesson that can be learned from Volcker’s experience is that once inflationary expectation are baked into the nation’s psyche, it can take a long time to restore the price stability that everyone craves. Powell is right to make that his top concern.

By the time Volcker stepped down as Fed chair, the inflation rate stood at 4.28 percent, down sharply from twelve percent where it stood when he staged the “Saturday Night Special.” But the nation slogged through eight years of a stagnant economy with a stubborn streak of inflation that fell at a snail’s pace.

Even though he had some doubts about the impact of the policies he launched, Volcker didn’t blink and he gets credit for sapping the strength of the inflationary psychology that threatened the country. There’s a lesson here for Powell and the current board of the Federal Reserve. Volcker didn’t cave.

—James O’Shea

Inflation Groupthink