I started my career as an economist at the FRB-NY in July 1976. Paul Volcker was president of the bank at the time. We were on a first name basis: He called me "Ed," and I called him "Mr. Volcker." He went on to become the Fed chairman from August 6, 1979 to August 11, 1987, when he was replaced by Alan Greenspan. Volcker rarely speaks in public and rarely criticizes his successors. But that’s what he did today in a speech before the Economic Club of New York.
He started by recalling that during the 1930s and 1940s the Fed pegged interest rates close to zero. During the Great Depression, the Fed initiated that policy. It was kept in place during WWII to accommodate the Treasury's needs to borrow lots of money to pay for the war. The Fed was pressured by the Treasury to continue to peg both short-term rates close to zero and at 2.5% or less for the Treasury bond yield. The result was double-digit inflation. The Treasury-Fed Accord, announced March 4, 1951, freed the Fed from that obligation.
Financial markets were not severely disrupted by the agreement. Volcker fears that an “orderly withdrawal from today’s broader regime of ‘quantitative easing' is far more complicated.” The Fed has become “the world’s largest financial intermediator.” He hopes that the Fed “ultimately return[s] to a more orthodox central banking approach.”
He believes that the Fed is trying to do more than it can accomplish. It certainly shouldn’t be accommodating “misguided fiscal policies.” He certainly isn’t a fan of the “dual mandate,” judging it to be “both operationally confusing and ultimately illusory.”
He started by recalling that during the 1930s and 1940s the Fed pegged interest rates close to zero. During the Great Depression, the Fed initiated that policy. It was kept in place during WWII to accommodate the Treasury's needs to borrow lots of money to pay for the war. The Fed was pressured by the Treasury to continue to peg both short-term rates close to zero and at 2.5% or less for the Treasury bond yield. The result was double-digit inflation. The Treasury-Fed Accord, announced March 4, 1951, freed the Fed from that obligation.
Financial markets were not severely disrupted by the agreement. Volcker fears that an “orderly withdrawal from today’s broader regime of ‘quantitative easing' is far more complicated.” The Fed has become “the world’s largest financial intermediator.” He hopes that the Fed “ultimately return[s] to a more orthodox central banking approach.”
He believes that the Fed is trying to do more than it can accomplish. It certainly shouldn’t be accommodating “misguided fiscal policies.” He certainly isn’t a fan of the “dual mandate,” judging it to be “both operationally confusing and ultimately illusory.”
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