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How Volcker Launched His Attack on Inflation

By William L. Silber, Marcus Nadler Professorship in Finance and Economics and Director, L. Glucksman Institute for Research in Securities Markets

The challenges of the Fed’s bid for transparency

Volcker was disappointed about not getting the job he had trained for his entire professional life, the job that provided the opportunity to rescue his country from crisis.

When Paul Volcker took over as president of the Federal Reserve Bank of New York on Aug. 1, 1975, he became a permanent member of the Federal Open Market Committee, the panel within the Federal Reserve System responsible for managing credit conditions and interest rates.

The New York Times labeled him a “monetary pragmatist,” adding that he was “philosophically sympathetic” with Fed Chairman Arthur Burns, meaning “that he leans toward tight money policies and high interest rates to retard inflation.”

Burns still had a reputation as an inflation hawk. He had testified that the Fed was “determined to follow a course of monetary policy that will permit only moderate growth in money and credit,” making it “possible for the fires of inflation to burn themselves out.” Yet during his eight-year tenure as chairman, Burns failed to control prices, which increased at a rate of 6.5 percent a year, an unprecedented pace for peacetime.

Volcker wasted little time asserting his independence. In November 1975, after just three months on the job, he dissented from Burns’s position at the FOMC, saying that he felt the right approach was “to hold interest rates fairly steady.” He dissented again eight months later, in July 1976.

Read full article as published in Bloomberg.