The U.S. economy is recovering “pretty well” and trying to juice it up by allowing a little extra inflation would be disastrous, said Paul Volcker, the former Federal Reserve chairman known for successfully reining in double-digit inflation.
“I think that is kind of a doomsday scenario,” Volcker told an economic summit when asked if the Fed should foster higher inflation to stimulate faster growth.
Higher inflation would backfire by causing interest rates to rise. “You are not going to get any stimulus and you are going to make it much harder to restore price stability,” Volcker told the Atlantic magazine conference.
Some economists have speculated that the Federal Reserve might allow inflation to exceed the central bank’s 2 percent target in an attempt to lower the unemployment rate, still stubbornly high at 8.3 percent.
Volcker, famed for pushing up interest rates into double digits in the early 1980s to tame inflation, would not comment directly on current Fed policy.
But he said a “debt tsunami” that hit the financial system in 2008 did huge amounts of damage, and there are no magic bullets for cleaning up that damage quickly.
“We have an economy that needs support. We are doing that with extreme fiscal policy. We are doing that with extreme monetary policy,” Volcker said.
Once the economy is on a sounder footing, he expressed confidence that the Fed will face no difficulty in shrinking its balance sheet without causing disruptions. “They do not in my judgment present a technical problem,” he said.
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