Volcker, backed by president Ronald Reagan after January 1981, stuck with this approach, despite intense political opposition, and that July the federal funds rate peaked at 22%. The policy worked: Annual inflation fell sharply to an average of just 3.4% from 1983 to 1989. The Fed had satisfied in extreme form what later became known as the Taylor Principle (or, more appropriately, the Volcker Principle), whereby the federal funds rate increases by more than the rise in the inflation rate.
SINGAPORE (July 15): One of the remarkable features of post-war economic history has been the taming of inflation in the US and many other countries since the mid-1980s. Before then, the US inflation rate (based on the deflator for personal consumption expenditures) averaged 6.6% a year during the 1970s, and exceeded 10% in 1979-1980.
In the early- and mid-1970s, presidents Richard Nixon and Gerald Ford tried to curb inflation with a misguided combination of price controls and exhortation, along with moderate monetary restraint. But then came president Jimmy Carter, who, after initially maintaining this approach, appointed Paul Volcker to chair the US Federal Reserve in August 1979. Under Volcker, the Fed soon began to raise short-term nominal interest rates to whatever level it would take to bring down inflation.
