What historical event does the Volcker Moment refer to?

Okay, let's talk about the "Volcker Moment," a phrase very famous in economic circles.

What is the "Volcker Moment"?

Simply put, the "Volcker Moment" refers to the historical period from the late 1970s to the early 1980s when Paul Volcker, then Chairman of the Federal Reserve, implemented extremely aggressive monetary tightening policies (primarily drastic interest rate hikes) to combat the severely high inflation in the United States, ultimately succeeding in taming it.

The term is now often used to describe: a central bank of a country that, in order to control runaway inflation, is willing to risk an economic recession to implement tough, decisive, and politically independent monetary policies.

What Happened Then? (Background Story)

Imagine the United States in the 1970s, its economy in terrible shape, suffering from a peculiar illness called "stagflation."

"Stag" (stagnation): refers to economic stagnation, high unemployment rates, and difficulty finding jobs.
"flation" (inflation): refers to severe inflation, with prices skyrocketing. What was worth $100 today might only be worth $90 next month; money was rapidly losing its value.

This situation of "no economic growth but soaring prices" caused widespread distress. The cost of living for ordinary people skyrocketed, leading to widespread public discontent and a loss of confidence in the government and the future. Previous administrations and the Federal Reserve tried many solutions, but inflation was like an out-of-control wild bull that couldn't be reined in.

Volcker's "Bitter Medicine"

In 1979, Paul Volcker was appointed Chairman of the Federal Reserve. He was a tall man, standing over two meters, and his character was as formidable as his stature. Upon taking office, he made it clear: he would defeat the monster of inflation at all costs.

His primary weapon was—aggressive interest rate hikes.

What does an interest rate hike mean? It means raising the benchmark interest rate. You can simply understand it as the interest on bank loans becoming extremely high.
What were the effects?
- For businesses, the cost of borrowing to build factories or expand production became prohibitively high, leading many to simply stop.
- For individuals, mortgage and car loan interest rates became absurdly high, deterring people from buying homes or cars.
The ultimate result was: consumption and investment across society quickly "cooled down," and economic activity was forced to a screeching halt.

Volcker raised interest rates from around 10% all the way to a staggering 20%! This is unimaginable by today's standards.

"Short-Term Pain" and "Long-Term Victory"

Volcker's "bitter medicine" had severe side effects, and the US economy quickly plunged into a deep recession.

The Pain: Unemployment rates soared above 10%, countless companies went bankrupt, and farmers lost their livelihoods. Volcker became the most unpopular man in America. He faced widespread criticism in Congress, with some even sending him timber to build his own coffin. He endured immense political pressure.

However, Volcker resisted all pressure, insisting on the principle of "short-term pain for long-term gain."

The Victory: By 1983, the effects became evident. The runaway inflation rate was indeed brought down from double digits to below 4%. The wild bull of inflation was finally tamed.

This victory was profoundly significant:

Restored Confidence: It re-established the Federal Reserve's credibility as an "inflation fighter," reassuring people that the dollar's purchasing power was stable.
Ushered in a New Era: With inflation under control, the US economy entered a period of "Great Moderation" lasting over two decades, characterized by sustained economic growth and manageable, low inflation.

Thus, the "Volcker Moment" not only represents that painful period of recession but also the courage and determination of central bankers to make difficult, unpopular decisions for the long-term health of the nation's economy. Since then, whenever a country around the world faces severe inflation, people inevitably discuss whether its central bank governor possesses "Volcker's resolve."