Paul Volcker’s leadership of the Federal Reserve was enormously consequential. The former chairman — who died Sunday in New York at the age of 92 — bequeathed to his heirs and the global economy two major legacies: one from which subsequent Fed chiefs benefit and another that central bankers have sought to dismantle.
The benefit is an economic system from which inflation has been wrung. Surging prices were the biggest challenge facing American postwar dominance. In the months after Volcker was appointed Fed chairman in 1979, consumer prices were increasing at about 15%. It’s almost hard to grasp how different things were, with inflation now struggling to hold above 2%.
Volcker pushed interest rates to 20% to wrest control of inflation. A deep recession followed, as did an economic spurt in the 1980s when the medicine worked and borrowing costs came down. Inflation was just never the same again and has been steadily receding as a pernicious force ever since.
It’s the relative absence of inflation that has given central bankers everywhere the ability to fine-tune expansions or revive growth without worrying about the proverbial genie escaping. That some of Volcker’s successors, including Ben Bernanke, Janet Yellen and occasionally Alan Greenspan, worried about too-low inflation is testimony to the impact of the Volcker-era accomplishments.
Now, to the legacy that more recent Fed leaders have tried to pull apart. The scale of Volcker’s assault on inflation and his towering physical presence contributed significantly to the cult of the central banker, the primacy of an all-knowing, all-seeing chairman. Volcker was omnipresent in news, the personification of what the Fed was up to. He even appeared on magazine covers in Australia, where I grew up. I remember thinking: Who is this guy with the cigar smoke twirling around him? He was sometimes referred to as the second-most-important person in the U.S., after the president.
Perhaps it was inevitable such a radical policy was going to be associated with an individual rather than an institution. Many central banks, including the Fed, formally make decisions through votes on a policy committee. But there’s one person the public focuses on.
Perhaps, too, it was inevitable that the expansion of capital markets that followed the Cold War would bring inordinate attention to monetary gurus. Volcker’s successor Greenspan, dubbed “the Maestro” by author Bob Woodward, took this to a whole other level.
Lately, central bankers have become uncomfortable with their royal status. When Bernanke took over from Greenspan, he began de-emphasizing the role of chairman and focused on inflation targets as a way to get people to look at numbers rather than individuals. The financial crisis accelerated this. The Fed now publishes reams of information and projections, holds news conferences and, yes, releases the famous dot plots, charting rate forecasts.
Jerome Powell, the current Fed chair, is thought to be ambivalent about some of this crisis-era paraphernalia. Powell comes across as someone who knows the limitations of the Fed’s wisdom.
The decoupling of leader from institution has a ways to go. The fanfare that greeted Christine Lagarde’s arrival at the European Central Bank testifies to this. Same with the rock-star status accorded Mark Carney when he became governor of the Bank of England in 2013. It resembled monetary Beatlemania. The idolization of Volcker was the first step on this slippery slope.
But Volcker was a modest man in his personal lifestyle and humble about his shortcomings. He would approve of a bit of central bank de-canonization at this moment. Certainly his own role in economic history is assured.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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