Federal Reserve's Inflation Fight

December 7, 1979

Report Outline
Volcker's Tight-Money Policy
Money Supply and Inflation
Controlling the Money Supply
Special Focus

Volcker's Tight-Money Policy

Abrupt Shift in Monetary Policy on Oct. 6

When Paul Volcker was sworn in as chairman of the Federal Reserve Board on Aug. 6, there were widespread expectations of shifts in U.S. monetary policy. Volcker, formerly president of the New York Federal Reserve Bank, was known for his conservative views on managing the nation's money supply. He had consistently voted with the minority favoring higher interest rates and tighter money at meetings of the Federal Open Market Committee in the months preceding his appointment. Volcker's appointment was considered a signal to the financial community, both here and abroad, that the Carter administration was ready to fight inflation with the full force of monetary policy.

Two months later, to the day. Volcker began to fulfill those expectations. On the night of Oct. 6, a Saturday, the Federal Reserve (“the Fed”) announced it would raise the rate of interest it charged on loans to member banks by a full percentage point and was prepared to allow interest rates to fluctuate more widely than any time in recent history in order to focus more accurately on bank reserves and thus the growth of the money supply.

The business community responded enthusiastically to the “Saturday Night Special,” as the new policy came to be known. The dollar stopped its downward descent on most international exchanges, and the price of gold stopped climbing. But closer to home, the Fed's actions threw stock, bond and commodity markets into turmoil and quickly led to record lending rates which threatened to close off much of the nation's housing market. If the long-expected recession had not come yet, a group of economists told Time magazine, it was surely on its way now. Economist Otto Eckstein predicted unemployment would reach 8 percent by the second half of 1980, up from 5.8 percent in October. “The Federal Reserve is taking a tremendous gamble with the economy,” Eckstein said. He said it was too early to tell if the Fed would “succeed in licking inflation without creating another recession as deep as 1974.”

ISSUE TRACKER for Related Reports
U.S. Dollar and Inflation
Jul. 19, 2019  The Future of Cash
Oct. 2008  The Troubled Dollar
Feb. 13, 1998  Deflation Fears
Mar. 13, 1987  Dollar Diplomacy
Oct. 14, 1983  Strong Dollar's Return
Jul. 11, 1980  Coping with Inflation
May 16, 1980  Measuring Inflation
Dec. 07, 1979  Federal Reserve's Inflation Fight
Jun. 09, 1978  Dollar Problems Abroad
Sep. 20, 1974  Inflation and Job Security
Feb. 26, 1969  Money Supply in Inflation
Feb. 14, 1968  Gold Policies and Production
Dec. 15, 1965  Anti-Inflation Policies in America and Britain
Mar. 15, 1965  World Monetary Reform
Dec. 02, 1964  Silver and the Coin Shortage
Oct. 17, 1962  Gold Stock and the Balance of Payments
Dec. 15, 1960  Gold and the Dollar
Oct. 10, 1956  Old-Age Annuities in Time of Inflation
Jan. 17, 1951  Credit Control in Inflation
Aug. 10, 1949  Dollar Shortage
Oct. 04, 1943  Stabilization of Exchanges
Jan. 21, 1941  Safeguards Against Monetary Inflation
Mar. 25, 1940  United States Gold in International Relations
Dec. 14, 1937  Four Years of the Silver Program
Oct. 04, 1934  Inflation in Europe and the United States
Jan. 30, 1934  Dollar Depreciation and Devaluation
Sep. 05, 1933  Stabilization of the Dollar
May 29, 1933  Invalidation of the Gold Clause
Mar. 15, 1933  Inflation of the Currency
Oct. 25, 1924  Bank Rate and Credit Control Federal Reserve Policies and the Defaltion Issue
Financial Institutions
Investment and the Stock Market