Warning Signs of a “Volcker Moment”

Paul Volcker, the former Federal Reserve chairman who was my longtime friend and officemate, died at the end of 2019 before Covid-19 swept the planet. But as the world has struggled to cope with the economic and human damage inflicted by the pandemic, I am often reminded of Paul’s concerns that policymakers would forget the important lessons imparted during his years as the central banker who led the fight against runaway American inflation.

The U.S. economy is finally exiting the coronavirus crisis, with half of adults inoculated and vaccines available to everyone who, in America at least, is willing to receive a shot. Growth is heating up, with output rising at a robust 6.4% in the last quarter, a rate not seen since 2003. Forecasters predict that U.S. GDP will soon return to the size it was before the virus hit.

This is to be celebrated. Everyone wants to get out of the house, live a little, see friends and families and cast aside bad memories of the past horrible year. But as markets boom, and vaccinated consumers re-engage, supported by exceptionally supportive monetary policy, highly stimulatory fiscal policies, and rapidly rising asset prices, I worry the Fed faces the risk of an inflationary “Volcker Moment.” The central bank must be prepared to step in quickly if price increases are not fleeting, but sticky – and damaging, especially to the poor…

Read the full op-ed.