# Volcker Shock The **Volcker Shock** is the Federal Reserve's 1979–1982 campaign to end the [[Great Inflation]] by letting interest rates rise as high as it took — the only time the Fed has deliberately induced a deep recession to break an inflation and been allowed to finish the job. This page covers the policy episode; [[Paul Volcker]] covers the man, before and after. ## The mechanism On the evening of **Saturday, October 6, 1979** — two months into his chairmanship — Volcker called a rare press conference to announce that the [[Federal Open Market Committee]] would stop targeting the federal funds rate and instead manage the **volume of bank reserves** to control money growth. The practical effect was to hand the interest rate to the market. The FOMC's tolerated funds-rate band widened from 50 basis points in September (11¼–11¾%) to 400 in October (11½–15½%). The reserve-targeting procedure borrowed [[Monetarism]]'s logic, and it had a political use as well: a Fed that "targeted money" did not have to announce a 20 percent interest rate. The rate simply went where the reserve target sent it. ## The path | Date | Event | |---|---| | Oct 6, 1979 | New operating procedure announced; the funds rate is near 14% by year-end | | Mar 14, 1980 | [[Jimmy Carter]] imposes consumer credit controls (Executive Order 12201), deepening a recession already under way; lifted July 3 | | Mar 1980 | CPI inflation peaks at **14.8%** as published (about 11.4% under today's housing method) | | Apr 1980 | Funds rate averages 17.6% | | Nov 1980 | Carter loses the [[1980 Presidential Election]] to [[Ronald Reagan]] | | Late 1980 | Funds rate reaches **20%**; the prime rate hits **21.5%** in December | | June 1981 | Effective funds rate averages **19.10%**, the monthly all-time high | | July 1981 – Nov 1982 | The second, deeper recession; unemployment reaches **10.8%** in November 1982 | | Fall 1982 | The Fed returns to targeting the price of money rather than the quantity and eases | | 1983 | Inflation below 4%; Reagan reappoints Volcker | ## What it cost, and who paid Two recessions in three years, unemployment at its highest since 1941, and the costs concentrated on the most rate-sensitive parts of the economy — homebuilding, farming, manufacturing — plus Latin American governments carrying dollar debt. Creditors and holders of financial assets, by contrast, emerged with the high real returns of the following decade. The episode is the clearest demonstration that tight money has a class shape just as easy money does. ## What it bought Credibility. The Fed went from the institution that had allowed the Great Inflation to the one that ended it, and every chair since has drawn on that capital — which is why the [[Expectations Channel]] could work at all in later decades. The pressure did not stop: in 1984, per Volcker's memoir, James Baker told him in front of a silent Reagan that "the president is ordering you not to raise interest rates before the election." The difference from the Burns era was that this time the demand was refused, and made in a room Volcker believed had no taping system. ## See also - [[Great Inflation]] — what it ended - [[Paul Volcker]] — the chair - [[Interest Rate Policy Timeline]] — Epoch 5 in full - [[Central Bank Independence]] · [[Inflation Expectations]] · [[Monetarism]]