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Raising interest rates is a lesson Powell learned from former Fed chair Paul Volcker


For the first two years of the pandemic, the Federal Reserve played good cop, keeping interest rates near zero in an effort to prop up the economy. Now that it's facing stubbornly high inflation, the Fed has done an about-face and switched to bad-cop mode. The central bank raised interest rates this week for the fifth time in six months. It's the most aggressive series of rate hikes since the early 1980s, when a cigar-chomping bad cop named Paul Volcker was running the Fed. NPR's Scott Horsley begins our coverage.

SCOTT HORSLEY, BYLINE: Fed Chairman Jerome Powell acknowledged this week that the rapid rise of interest rates will cause some pain, including slower economic growth and possibly higher unemployment. Powell told reporters he and his colleagues will do whatever it takes to bring down inflation.


JEROME POWELL: We want to act aggressively now and get this job done and keep at it until it's done.

HORSLEY: In recent weeks, keeping at it has become a mantra for Powell. It also happens to be the title of Paul Volcker's autobiography. Volcker famously broke the back of inflation after a long stretch of sometimes double-digit price hikes in the 1970s. He's a role model for Powell, the first Fed chairman since Volcker to face inflation anywhere near that high. Here's how Powell put it in May.


POWELL: Who isn't an admirer of Paul Volcker? I knew him just a little bit and have tremendous admiration for him. He had the courage to do what he thought was the right thing.

HORSLEY: It wasn't easy. Volcker's draconian interest rate hikes triggered back-to-back recessions in the early '80s. Almost 4 million people lost jobs, as unemployment soared to nearly 11%. In hindsight, Volcker is revered as the inflation dragon slayer. But as Fed Governor Christopher Waller recalls, he was much less popular at the time.


CHRISTOPHER WALLER: I once talked to Paul Volcker about 10 years ago and said, man, it must have taken a lot of courage to do what you did, knowing what was going to happen. And he said, if I had known what was going to happen, I never would have done it.


WALLER: But once I did it, I couldn't back off.

HORSLEY: There are reasons to hope the current battle may not be as punishing. Unlike the 1970s, inflation is not yet baked into people's thinking. Most still expect prices to settle down in the coming years. Ending the pandemic and the war in Ukraine could also take some of the upward pressure off prices. But Powell and his colleagues are no longer banking on that. Instead, they're taking a page from Volcker's playbook, and they're ready to play bad cop with interest rates for as long as it takes to get prices under control. Scott Horsley, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.