"Since 1979, the fight against inflation constitutes the dominant ideological framework of monetary policies"

Forty years ago, Fed President Paul Volcker implemented shock therapy against rising prices, which has since become the alpha and omega of central banks, says financial expert Nicolas Goetzmann in a tribune at the "World".

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The Fed's Headquarters, Washington, August 22, 2018. Chris Wattie / REUTERS

Tribune. In the United States, price increases crossed the 10% mark in the spring of 1979, just before the 1980 presidential election. The unions obtained salary adjustments of 7.4%. The price and wage controls put in place at the end of 1978 by Democratic President Jimmy Carter prove powerless to fight inflation. The US president then decides to appoint Paul Volcker as head of the US Federal Reserve. Former chairman of the New York Reserve and former under-secretary of the Treasury Richard Nixon, the latter enjoys a solid reputation of rigor. Two months after taking office, it modifies the Fed's monetary approach and begins hostilities against inflation, pushing interest rates above 15%.

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The maneuver remains insufficient: the financial markets doubt as much of the method as the determination of the authorities to conduct a policy of rigor in full election year. Prices continue to rise as the United States enters its deepest recession since the Great Depression. Ronald Reagan chose, in 1983, to entrust a second term to Paul Volcker at the head of the Fed. While the unemployment rate reached 10.8% at the end of 1982, he tightened his embrace. In January 1981, interest rates exceeded 20%. This unwavering determination ends up paying off. By almost 15%, inflation fell to less than 3% by mid-1983. Inflation was good "A monetary phenomenon".

An example for the West

Ronald Reagan's biographer, the American historian H. W. Brands summarizes the thought behind the "Volcker shock": "The only solution was shock therapy: a restrictive monetary policy as long as necessary to change the moods, the expectations of the markets and those of individuals. " By proposing a clear objective and using all the tools at his disposal to achieve this, that is by making his action credible to the public, Paul Volcker had the merit of demonstrating the effectiveness of the monetary policy to fight against inflation, even though doubts had been expressed in this regard by the big names of the Keynesian school of the prestigious Massachusets Institute of Technology.


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