Volcker shock and early-1980s recession

Facing inflation above 13% at the start of 1980, Federal Reserve chair Paul Volcker pushed the federal funds rate above 19% to break entrenched price expectations. The tightening worked on inflation but at a heavy cost: US unemployment climbed above 10% by late 1982, and manufacturing and housing both contracted sharply. Because so much developing-world debt was dollar-denominated and floating-rate, the sudden rise in US interest rates also raised borrowing costs across Latin America and beyond, helping set up the debt crisis that followed in 1982. By 1983 US inflation had fallen to around 3%, and the episode became the reference case for how far a central bank can go to restore price stability.