Who Are the Major Players in the Battle Against Inflation?

Who Whipped Inflation?

Fed chairs
(L-R) Federal Reserve Chairs Janet Yellen, Paul Volker, Alan Greenspan and Ben Bernanke. Photo: Mark Wilson/Getty Images

The most influential players in the fight against inflation are the Chairmen of the Board of Governors of the Federal Reserve System. But the challenges they've faced, and the tools they've used, have been very different. 

Mariner S. Eccles (1934-1948): Inflation reached a staggering 18.1 percent in 1946. That's because of Federal government programs to provide jobs for returning veterans. The Fed Board expected deflation after World War II.

That's what occurred after the Civil War and World War I. When inflation hit instead, the Philadelphia Fed Chair wanted to raise interest rates to counter it. He was chastised by Eccles who was the Fed chair. He had worked with President Roosevelt to combat the Great Depression. Also, the Treasury Department pressured the Fed to keep interest rates low. It wanted to pay off the government's World War II debt at low cost.

Thomas McCabe (1949 - 1951): McCabe created the independent position of today's Federal Reserve. He negotiated the Treasury-Federal Reserve Accord with the Truman Administration. That ended the Fed's obligation to monetize the U.S. debt. Low-interest rates allow the federal government to spend more. That increases the money supply

William McChesney Martin Jr (1951-1970): Martin aggressively fought inflation with contractionary monetary policy. He was the first truly independent Fed chair.

He inherited 6 percent inflation but successfully fought it until 1968. He raised the discount rate in 1965, despite President Lyndon Johnson's objections. But LBJ's spending on the Great Society and the Vietnam War created 4.7 percent inflation in 1968. Americans bought more imports, which sent dollars overseas.

Foreign banks exchanged the dollars for gold per the 1944 Bretton Woods agreement. That threatened to deplete U.S. gold reserves at Fort Knox. The Fed raised rates to strengthen the dollar's value. But that created a recession. 

Arthur Burns (1970 - 1979): Burns became Fed Chair during the Great Inflation (1965 - 1982). In short, easy monetary policy during this period helped spur a surge in inflation and inflation expectations. When inflation began to rise, policymakers (in retrospect) responded too slowly, leading to a recession. He tried vainly to counteract President Nixon's economic policies. In 1972, Nixon imposed wage-price controls to stop inflation. Instead, it worsened the recession. Businesses couldn't raise prices, so they laid off workers. Employees couldn't get raises, so they cut back on spending. Burns lowered interest rates to fight the recession, but that worsened inflation. When he raised rates, it slowed economic growth. By the end of his term, the United States suffered by stagflation.

Paul Volcker (1979-1987):  Volcker fought 10 percent annual  inflation rates by raising the Fed funds to 20 percent and keeping it there until inflation was in check. Unfortunately, it created the recession of 1981.

 Volcker took this dramatic and consistent action to get everyone to believe that inflation could actually be tamed. 

Alan Greenspan (1987-2006): Greenspan advocated laissez-faire economics. That's where the Fed doesn't try to micromanage the economy. It adheres to broad goals of stimulating the economy while avoiding inflation. He relied primarily on the fed funds rate to achieve his goals. 

To fight the 2001 recession, Greenspan​ lowered the fed funds rate to 1.25 percent. That also lowered interest rates on adjustable–rate mortgages. The payments were cheaper because their interest rates were based on short-term Treasury bill yields, which are based on the fed funds rate. 

Many homeowners who couldn't afford conventional mortgages were delighted to be approved for these interest-only loans.

 As a result, the percent of subprime mortgages doubled, from 10 percent to 20 percent, of all mortgages between 2001 and 2006.  By 2007, it had grown into a $1.3 trillion industry. The creation of mortgage-backed securities and the secondary market helped end the 2001 recession. (Source: "The Mortgage Mess Spreads," BusinessWeek, March 7, 2007.)

Many people didn't realize their payments would only remain at a low rate for the first three to five years. ​Greenspan raised rates in 2004 to fight 3.3 percent inflation. He raised them to 4.25 percent in 2005 and 5.25 percent by June 2006. By the end of the year, inflation was at a manageable 2.5 percent. For more, see Past Fed Funds Rate.

Greenspan's rate increase hit these mortgage-holders just when rates reset. Homeowners were hit with payments they couldn't afford. At the same time, housing prices began falling, so they couldn't sell either. That created massive foreclosures. For more, see What Caused the 2008 Financial Crisis?

Ben Bernanke: (2006 - 2014): Bernanke formally introduced the use of inflation targets as a way of setting public expectations of Fed actions. He used forward guidance to manage the public's expectation of inflation. His expertise was in the role of the Fed and monetary policy in the Depression. He created many new tools to combat the 2008 financial crisis. For a list and explanation of these, see Fed's Other Tools.

Janet Yellen: (2014 - 2018): She started her tenure by tapering the Fed's purchases of Treasurys as she wound down quantitative easing. Instead of inflation, Yellen must grapple with deflationary forces.

Inflation In Depth