The Fed’s Biggest Dilemma Since Volcker: Fight Inflation or Prevent a Recession — Possibly at the Same Time

When intelligent people are at a loss for what to do, a certain silence descends upon the room. The Federal Reserve is now using language that is cautious, cautious, and sometimes contradictory. Officials now sound more like weather forecasters during hurricane season than the confident surgeons who once described a routine procedure. It’s difficult to avoid thinking back to October 1979, when Paul Volcker summoned reporters to the Eccles Building on a Saturday night and essentially warned the nation that the medication would cause pain.

It’s not a perfect parallel. Volcker had to deal with inflation that had been rising for more than ten years due to oil shocks, Vietnam War spending, and a Bretton Woods collapse that was not fully understood at the time. The current state of affairs is more chaotic and, in a sense, unfamiliar. Following the pandemic, inflation increased, cooled, and then resisted falling to two percent. The labor market continues to generate figures that economists are constantly updating. Bond yields fluctuate based on rumors. There’s a feeling that the data itself is no longer trustworthy, or perhaps it was always this noisy and we simply stopped acting that way.

There are actually two sides to the Fed’s predicament. The nightmare scenario that frequently appears in old FOMC transcripts from the early 1980s is that if rates are cut too soon, inflation expectations could unanchor. Holding rates too high for too long results in what everyone else refers to as job losses and what economists politely refer to as “labor market deterioration.” Despite his reputation as the iron-willed inflation killer, Volcker actually lowered rates dramatically when a real recession struck in 1980. The legend usually removes that particular detail. This was noted by the Economic Policy Institute a few years ago, and it adds helpful complexity to the heroic narrative.

The extent to which the Volcker comparison has permeated economic discourse in 2026 is remarkable. A copy of Goodfriend and King’s “The Incredible Volcker Disinflation” appears to be kept close at hand by every Fed governor. The term “credibility” is used in the same ambiguous, respectful manner as “constitution” was once used by doctors, as if everyone understood what it meant. Before causing significant economic harm, investors appear to think the Fed will blink. The FOMC’s hawks seem to think that blinking would undermine decades of hard-won trust.

The texture of everyday American life continues to present minor contradictions outside of the larger discussions. Receipts for groceries still hurt. Despite having inventory, auto dealerships are seeing a decline in foot traffic. Recently, a Phoenix resident told a reporter that her mortgage rate quote seemed to be a typo. Early in the 1980s, automobile dealers shipped Volcker real coffins that contained the keys to unsold cars. This little theatrical production captured a genuine aspect of how monetary policy affects people’s daily lives. This time, we haven’t witnessed anything quite that dramatic, but the underlying annoyance is evident.

The Fed might thread this needle. Though infrequently from this level, inflation has previously decreased without a recession. It’s also possible that the soft landing that everyone keeps bringing up is just an outdated expression, similar to “this time is different.” The truth is that no one knows, and those who assert certainty in either direction are typically trying to sell something. Volcker recognized that monetary policy is primarily psychological and partially mathematical, which his successors continue to relearn. The easy part is the math.