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The Volcker Tightening Cycle: Explaining the 1982 Course Reversal

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Abstract

This article studies the factors that led former Federal Reserve Chairman Paul Volcker to stop and then reverse course in the most famous monetary tightening cycle in U.S. history. I explain how the Fed began cutting its policy rate target, thus ending the tightening cycle, in July of 1982. Although the Fed had gained some ground in its fight against inflation, in mid-1982, inflation was running above 7 percent, well above the 2 percent inflation rate that the U.S. enjoyed before the Great Inflation. Beyond the Federal Open Market Committee’s (FOMC) partial success at taming inflation, I describe how economic pain and financial market stress were two practical and related considerations in the summer of 1982 that likely contributed to the monetary policy pivot. Finally, I discuss the political pressure facing the FOMC at that time.

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  • Bill Dupor, 2025. "The Volcker Tightening Cycle: Explaining the 1982 Course Reversal," Review, Federal Reserve Bank of St. Louis, January.
    • Handle: RePEc:fip:fedlrv:99480
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    References listed on IDEAS

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    2. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    3. Athanasios Orphanides, 2002. "Monetary-Policy Rules and the Great Inflation," American Economic Review, American Economic Association, vol. 92(2), pages 115-120, May.
    4. William Poole, 1971. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model: Rejoinder," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 85(4), pages 716-717.
    5. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76(4), pages 678-678.
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    Cited by:

    1. Alberto G. Musalem, 2025. "Remarks on the Economic Outlook and Monetary Policy," Speech 99640, Federal Reserve Bank of St. Louis.

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    More about this item

    Keywords

    monetary policy tightening; inflation; Federal Open Market Committee (FOMC);
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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