Dispatches from the war on inflation

The year - 1980. Paul Volcker is finishing up his first year as Chairman of the Federal Reserve, during which he has engineered a startling turnaround in monetary policy towards a much more hawkish approach toward inflation. Interest rates are sky-high. Following President Carter's imposition of credit controls in the spring, the economy is in freefall. The Fed is tempted to ease, but inflation expectations, as well as inflation itself, remain stubbornly high, and the Fed is concerned that any signs of backpedalling will undermine its long-term efforts. International currency markets, reeling from global political instability and skyrocketing oil prices, are perched on a knife's edge, wondering what the Fed will do. The fate of the global economy hangs in the balance.

We take you now to the boardroom of the Federal Reserve's offices in Washington D.C., July 9, 1980, where the Federal Open Market Committee is meeting:

MR. GRAMLEY. Mr. Chairman, don’t the facts indicate that the Committee has not equivocated in that respect? If I remember the numbers right, in 1977 the growth rate of M-1A was 7.7 percent; in
1978 it was 7.4 percent: in 1979 it was 5.1 percent; and in 1980 it will undoubtedly be less yet. The problem is, Larry, that money and prices do not track closely together. And while that deceleration in monetary growth was taking place, the rate of increase in prices accelerated. That’s what we have to live with, whether we like it or not.

MR. ROOS. But, Lyle, we believe that there is a direct tracking of the rate of growth of money and prices and also the rate of growth of money and output.

CHAIRMAN VOLCKER. Well, I think we have lunch approaching.

MR. SCHULTZ. Before we got into that discussion, what you said just prior to that sounded pretty good to me. It was somewhat in accordance with your talents: It was even more waffling than what Steve had to say!

MR. PARTEE. Steve is not waffling enough for me.

MR. SCHULTZ. I would like to waffle a bit more than what Steve said, and I thought you had done that very effectively.

MR. GRAMLEY. I could certainly agree with your waffle. Your waffle I like.

MR. SCHULTZ. Yes.

CHAIRMAN VOLCKER. Has my waffle been recorded?

SPEAKER(?). Just put a little syrup on it and we’ll--

MR. PARTEE. That‘s what you’re likely to do!

CHAIRMAN VOLCKER. Was somebody listening to that [closely] enough to try to [put some wording together] after lunch?

MR. AXILROD. I would suggest that your waffle, Mr. Chairman, is probably one that would fit better in the policy record. And the Committee could be silent in the directive.

CHAIRMAN VOLCKER. I'm not quite sure why we need anything in the directive. It's not a decision. This kind of vague statement isn't going to affect what we do before the next meeting anyway.

MR. PARTEE. I'm told that my subommittee, of which you were a member at the time, proposed that it be in the directive. I can't remember why.

CHAIRMAN VOLCKER. Well, I can't remember why either. Unless somebody can think of a reason, let me propose that it be in the report but not in the directive. I don't see off-hand what purpose it serves in the directive since it's a vague statement anyway.

VICE CHAIRMAN SOLOMON. Coming back to this proposed waffle: Before you ask for a show of hands you ought to make people understand what the alternative is--the second thing they're going to be asked to
show their hands on--which I gather is a completely neutral statement.

CHAIRMAN VOLCKER. Completely neutral? It's not neutral in the sense of raising the range, but neutral as between changing it or not changing it.

VICE CHAIRMAN SOLOMON. Okay. Even though I welcome the adherence of Chuck and Lyle, I'd like to--

CHAIRMAN VOLCKER. That makes you suspicious of it?

VICE CHAIRMAN SOLOMON. Well, what you said in your reformulation of Steve's [wording] is that consistent with our longrun policy, we would like to see the aggregates lower in '81 as well, but we don't know if we can make it for such and such reasons. What I would like to suggest we say--again because I'm thinking of the market impact, which could be very damaging to all of us--is that consistent with [our long-run policy], it is too early for us to indicate anything specific because there are too many caveats and we just don't know where we are going to come out. In other words, to say to the market that we don't know if we can make it--

CHAIRMAN VOLCKER. Well, that is not the language that I would use. I would suggest, particularly since it's 2 o'clock, if there is a willingness to work in this direction--and that seems to be the consensus--that we see if our staff can come up with a formulation before the end of the meeting that incorporates words that we can look at a little more specifically. We can't resolve it just--

MR. ROOS. We're not committing to the waffle, though, by doing this?

CHAIRMAN VOLCKER. Not at this stage, no. Why don't we have a few sandwiches for the time being.

MR. SCHULTZ. We're suggesting that the staff, rather than have lunch, eat their work!

CHAIRMAN VOLCKER. Well, we have sandwiches right next door, I believe.

MR. AXILROD. Mr. Chairman, with regard to President Solomon's point on--

MR. PARTEE. If we work on this waffle, it finally will be a pancake.

CHAIRMAN VOLCKER. We are going to have waffles for lunch!

VICE CHAIRMAN SOLOMON. The Open Market Committee will be known as the International House of Pancakes!

MR. AXILROD. Tony, the law says the Committee has to say something about it.

CHAIRMAN VOLCKER. It does? In the directive?

MR. AXILROD. No, not in the directive, but in the report.

[Lunch recess.]