Legendary former central banker Paul Volcker praised Jerome Powell as the current Federal Reserve chairman faces fire from President Donald Trump for raising interest rates.
“Powell handled himself exceptionally well” recently as he made the case for further rate increases, Volcker said in an interview this week. “He reflected the importance of maintaining price stability.”
Speaking ahead of publication of his autobiography next week, Volcker said the Fed was at a “crucial period” when it’s tempted to delay tightening credit too long because the economy is doing well and inflation is not yet a problem.
“Powell reflected a little bit of that concern that we’re always too late” in raising rates to maintain price stability, added Volcker, who is credited with ending an era of double-digit inflation when he headed the Fed from 1979 to 1987.
Trump has repeatedly criticized Powell and his colleagues in recent weeks for hiking rates when consumer price increases are in check and has called the central bank the biggest threat to the economic expansion.
In defending the Fed’s strategy of gradual rate hikes, Powell has said that a main task of monetary policy is to anchor inflation expectations at a low level — a lesson the central bank learned under Volcker. If consumers and companies believe price rises will skyrocket, they’ll act in ways that will help bring that about.
In his book — entitled “Keeping at It: The Quest for Sound Money and Good Government” — Volcker called the Fed a “precious asset” that “does need to be shielded from partisan politics.”
Volcker is no stranger to presidential pressure on the Fed. He recounts being summoned to a meeting with President Ronald Reagan in the summer of 1984 when Chief of Staff James Baker told him he was being ordered not to raise rates before the election.
Co-written with Bloomberg Markets Editor Christine Harper, the memoir covers the decades Volcker has spent in public service, including a stint as a senior Treasury Department official when the gold standard was abandoned to chairmanship of a commission that investigated how Swiss banks handled funds placed with them by victims of Nazi persecution.
Its publication was moved up to Oct. 30 from late November because of the 91-year-old’s failing health.
In highlighting the importance of price stability in the book, Volcker writes that the Fed’s adoption of a 2 percent inflation target in 2012 was “ill-advised.”
Pointing to comments by Fed officials and others, he worries that the objective might be increased while arguing that no index can completely capture the real change in consumer prices.
Volcker would prefer that the Fed had stuck with the verbal description of price stability proffered by his successor, Alan Greenspan: “That state in which expected changes in the general price level do not effectively alter business or household decisions.”
The arch inflation fighter also has misgivings about the Fed’s dual mandate to achieve both full employment and stable prices, saying it causes more harm than good. “I don’t want to forget about growth,” he said in the interview. But “if you worry too much about growth at the expense of inflation, then you’re in trouble.”
Emphasizing that sound finance as well as price stability is critical for the health of the economy, Volcker doubts that banks and their lobbyists will succeed in their efforts to undo many of the reforms put in place after the financial crisis. They’re “going to find it difficult to roll it back more than they’ve already tried,” he said.
He called lobbyists’ complaints about the so-called Volcker Rule that restricts banks from investing their own capital “hogwash.”
“The banks are more profitable and hopefully a little more safer,” he said. “There’s no indication of a lack of liquidity in the market.”
Volcker says that he decided to pen a memoir because of his concern over a “breakdown in the effective governance of the United States” that has been going on for some time. He blames polarization and the growing influence of money in politics for the paralysis he sees in public policy making.
He is scathing about the ways of Washington in his book, calling lobbyists “chipmunks” and labeling the city a “swamp” of special interests — a description also used by the president.
In fact, Volcker doesn’t demur when it’s noted that some of his criticisms sound a lot like those made by Trump and self-proclaimed democratic socialist Senator Bernie Sanders about the system being stacked against the little guy.
“I do think we are getting plutocrats,” he said in the interview. “Part of society is way out of touch with other people. It shows up in the maldistribution of income in recent years.”
Trump amplifies those divisions with his rhetoric but what gives them force is that some of the president’s barbs are legitimate, according to Volcker.
“A lot of people are disturbed,” he said, adding, “we’ve got a leader who scratches that itch massively.”
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