Volker Hits Brakes;  Recession Follows

1982  In a widely announced policy move, Paul Volker and the Fed slowed the rate of growth of the money supply to curtail the recent inflationary spiral.  Although some mathematical proofs exist that anticipated monetary policies have no real effects, the U.S. unemployment rate increased from 7.5% in 1981 to over 9.5% in 1982.

It would be hard to label the 1982 as anything less than intentional.  Tight monetary policy increased the Federal funds rate, which was about 11% in 1979, to 20% by June 1981.  The prime lending rate hit 21.5%, and long-term government bond yields topped out at over 15%.  The ensuing recession began in July 1981 and ended in November 1982.

Victory over inflation came at a cost in terms of unemployment, but the outcome was unmistakable.  Inflation as measured by the consumer price index was 13.3% in 1979, 12.5% in 1980, 8.9% in 1981, and 3.8% in 1982.  The CPI inflation rate did not get above 4% until 1987.