Former Fed chief: Inflation isn't dead
Paul Volcker, the Fed chairman in the early 1980s, says rising prices and weak dollar are big concerns for the economy.
NEW YORK (CNNMoney.com) -- Former Federal Reserve Chairman Paul Volcker, famous for helping whip sky-high inflation in the early 1980s, said Tuesday that rising prices should again be a subject of concern for the U.S. economy.
Speaking before the Economic Club of New York, Volcker said today's economic conditions are not as severe as they were during his tenure, but still suggested caution about the threat of inflation. He also warned that the weak dollar is a major problem.
"We are at a point where we have to worry about [inflation]," said Volcker, who was appointed Fed head in 1979 by President Jimmy Carter before stepping down in 1987.
Volcker's remarks came just ahead of the Tuesday release of the minutes from the Federal Reserve's latest meeting in March. And many Fed members don't appear to share Volcker's inflation concerns.
According to the minutes, current Fed poilcymakers said they were fearful of a "severe and protracted downturn" in the U.S. economy. In addition, the Fed's staff members indicated that they now expect economic activity to decline in the first half of this year.
But the minutes also revealed that uncertainties about the outlook for inflation had risen. Two Fed members voted against the central bank's three-quarter point rate cut last month, arguing that a smaller rate cut made more sense in light of inflation worries.
Volcker's remarks also come at a time when his successor - Alan Greenspan - has endured criticism for helping to nurture the current financial crisis by keeping interest rates at low levels for an extended period of time earlier this decade. He's also been accused of not watching banks closely enough while the housing bubble was inflating.
"I was praised for the things I didn't do," Greenspan told the Wall Street Journal Tuesday. "I am now being blamed for things that I didn't do."
Current Fed chief Ben Bernanke has also faced criticism lately after the central bank helped orchestrate a marriage between the troubled investment bank Bear Stearns (BSC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500). The Fed agreed to guarantee loses of up to $29 billion's worth of Bear Stearns assets.
Critics have charged that the deal amounted to a government bailout of Wall Street at a time when American homeowners continue to struggle with the fallout from the housing market.
Volcker questioned the rescue during his speech, warning that it sends a message that the Fed would bail out other firms in times of future turmoil.
He also stressed the need for better regulation in his remarks, noting that the current financial system had "failed the test of the marketplace."
When asked about what impact further weakening in the dollar could have on the U.S. economy, Volcker suggested that the nation was already in the midst of a dollar crisis.
Last year, the U.S. dollar index, which measures the currency's performance against six of its biggest trading partners, fell nearly 9 percent. This year, the dollar has weakened further, sinking to historic lows against the euro and levels not seen in years against the yen. 
