Of many dubious claims that recent Federal Reserve Board nominee Stephen Moore made in a Wall Street Journal op-ed he published a couple weeks ago, perhaps the most startling was his claim that “to break the crippling inflation of the 1970s,” former Fed chair Paul Volcker linked Fed monetary policy to real-time changes in commodity prices. When commodity prices rose, Mr. Volcker saw inflation coming and increased interest rates. When commodities fell in price, he lowered rates.
Of course it’s true that, in the early 1980s (not the late 1970s), Paul Volcker’s Fed finally reigned-in the U.S. inflation rate. It’s also true that the Dodd-Frank Act’s section 619 implements a “Volcker Rule” barring banks from using customer deposits to engage in various kinds of proprietary trading. But I dare say it will be news to most people, as it was to me, that Volcker’s Fed tamed inflation by following another “Volcker Rule” that strictly geared its policy rate to the observed level of the prices of various commodities.
Instead, the story most of us have heard is that Volcker, inspired by monetarist writings, embraced a version of monetary targeting. As Ben Bernanke tells it, in October 1979
Volcker adopted an operating procedure based on the management of non-borrowed reserves. The intent was to focus policy on controlling the growth of M1 and M2 and thereby to reduce inflation, which had been running at double-digit rates. As you know, the disinflation effort was successful and ushered in the low-inflation regime that the United States has enjoyed since. However, the Federal Reserve discontinued the procedure based on non-borrowed reserves in 1982.
Whether targeting non-borrowed reserves was equivalent to targeting any (let alone more than one) monetary aggregate, and whether Volcker really cared whether it served that purpose, may well be doubted. Still, it is a long way from targeting any sort of index of commodity prices.
So, just where did Moore get the idea that Volcker had embraced commodity-price targeting? A little sniffing around produced the answer: from his long-time friend, fellow Trump-booster, and frequent coauthor, Arthur Laffer.