The Volcker Disinflation
The Volcker disinflation broke double-digit US inflation in the early 1980s by raising the federal funds rate to roughly 19%, which caused a deep recession (unemployment 10.8%) but pulled inflation from about 13.5% down to 3.2%.
| Fed funds peak | ~19% (1981) |
|---|---|
| Unemployment peak | 10.8% (1982) |
| Inflation | 13.5% → 3.2% (1980→83) |
When Paul Volcker became Fed chair in 1979, US inflation was in double digits and expectations were un-anchored. His answer was to raise interest rates dramatically, pushing the federal funds rate to around 19%.
Because what restrains demand is the real interest rate, rates had to get well above the inflation rate to bite, the Taylor Principle in action. They did, and the result was the deepest recession since the Great Depression: unemployment peaked at 10.8% in 1982. But inflation fell from about 13.5% to 3.2% within a few years.
The episode is the textbook lesson in the cost of disinflation: beating entrenched inflation required a deliberate, painful recession. It also rebuilt the Fed's credibility, an asset that made the following decades of low, stable inflation possible. Crucially, that pain is temporary: unemployment returned to its natural rate while inflation stayed low.
Sources: Federal Reserve History, "Recession of 1981–82"; Goodfriend & King (2005). See the methodology.