Paul Volcker is a tremendous hero with the Federal Reserve System and for the American economy. He took very tough actions and helped to break the back of double-digit inflation at a time when it had to be done. It was at great cost, but were better off for having done that. Weve been lucky enough to have Mr. Volcker come speak at a luncheon in Chicago first time Ive met him and I shared my views on policy with him, and he called me an inflationist before it was even close to appropriate. He thinks inflation objectives closer to zero would be appropriate, and I understand that.

ASMAN: Now, there is also a charge, uh, and this one, I think, may be more on target, that the Fed is a little too concerned these days, for the past year or so, about how the markets will react to its policies. That is, there are people like Paul Volcker, who really squashed inflation by his actions back in the day. He didn't give a damn what the market felt about what needed to be done to maintain the integrity of the dollar.

Is it true that the Fed is paying too much attention to what the market is doing?

FISHER: I think there are some differences of opinion on that. I don't agree with that. I -- by the way, was trained by the same man that trained Paul Volcker. I'm very much a Volckerite. And I think what we should focus in on is the real economy.

I have argued publicly that 0 interest rates and this massive monetary accommodation, obviously, has distorted the markets. These valuations are very, very high, because the rates are so much lower because interest rates are so low. And eventually, they'll have to be an adjustment.

But, you know, the real thing is whether the real economy, putting people back to work, keeping inflation under control, propelling the economy forward toward greater prosperity, that's what I worry about.

And I am less worried about the money changers and whether or not we're going to disappoint some of them. As long as it doesn't lead to crippling the economy...

I see three key parallels between the economic situation in 1979 and the economic situation in 2013. First, just like in 1979, the Federal Open Market Committee faces a challenging macroeconomic problem—although this time, the problem is stubbornly low employment as opposed to stubbornly high inflation. Second, there is a widespread perception that monetary policymakers lack either the tools or the will to solve this problem.

And third, the perception of monetary policy ineffectiveness is itself a key factor in generating the problem… If the public thinks that monetary policy is ineffective, then it will expect relatively weak macroeconomic conditions in the future. But these expectations about the future have a direct impact on current macroeconomic outcomes…

We’ve seen how the FOMC dealt with its problems in 1979 by adopting a goal-oriented approach to monetary policy. Given the parallels between 1979 and 2013, I believe that a goal-oriented approach would be useful again…

But, as Paul Volcker said in his 1979 speech, it is not enough to formulate or communicate a goal. The Committee has to stick to its formulated approach—that is, it must do whatever it takes to achieve its communicated goal. In the early 1980s, doing whatever it took meant being willing to keep money tight, even though interest rates and the unemployment rate rose to unusual heights. By doing whatever it took to achieve its goal, despite these short-term costs, the FOMC was able to bring down inflation and inflation expectations.

To start with, central bank credibility and low and stable inflation expectations are of critical importance. Earning that confidence is the most important thing the Fed can do in dealing with shocks as they occur. If the Fed doesn’t have that underlying confidence, then all sorts of things can go wrong and, indeed, the Fed may find itself willy-nilly taking policy actions intended to maintain or restore credibility rather than dealing with the current problem, whatever it might be. So, most of the work in dealing with the crises comes before they even happen. Where the Fed is now is a consequence of earning that credibility starting with Paul Volcker and then dealing successfully with a whole series of issues during the Volcker, Greenspan and now Bernanke eras.

When I joined the Bank of England in 1991, I was fortunate enough to be invited to dine with a group that included Paul Volcker.  At the end of the evening I asked Paul if he had a word of advice for a new central banker.  He replied--in one word--"mystique."  That single word encapsulated much of the tradition and wisdom of central banking at that time.

Somehow poor and wretched Volcker--never knowing where he stood on any issue--had succeeded in instilling an irrational fear of gold in his tyrannical master {John Connally}, whom he tried constantly to please by catering to his hatred of foreigners (particularly the French) instead of his capacity (not inconsiderable) for straight reasoning.

As cited in Volcker, the Triumph of Persistence by William L. Silber