It's 2022, not 1972
It's 2022, not 1972
The talking heads who rant about the Fed in the 1970s are dangerously stuck in the past. Instead, we must face the present moment with its challenges and advantages.
Addendum: This post is an example of me trying to make economics more accessible while sharing my expertise. I truly love economics, and my goal is to share that love with others. Above all, I want to create space for others to join these discussions, epsecially who do not look like a typical economist on the news or in policy circles or who don’t have the elite credentials. So yeah, some might see me as “not serious” here, but the worst thing I could do is take myself too seriously. It’s not about me.
The obsession with the 1970s in the debates about the Fed is a massive waste of time and creates dangerous blind spots. Everywhere you turn, the doomsayers scream, “it’s the 1970s again; the Fed has no choice but to cause a recession caused.” If we look back at the Fed’s thinking in the 1970s—as in its meeting transcripts—and compare them to the Fed and the world now, it’s clear the past is not the present. No time for the Time Warp.
I love Rocky Horror. And I’m dismayed by the Time Warp in inflation debates now.
Gloom and doom.
The 1970s are everywhere. Here’s Larry Summers:
I was arguing through 2021 that the right analogy was the Vietnam War period, when we used very expansionary fiscal policy, did not apply monetary restraint, and pushed inflation up very, very substantially. I think that now looks to have been a reasonable description of what happened in 2021. - February 4, 2022
And the history [of the 1970s] is that if you look at the overall path, the poor are worse off once you go through that whole process than they would’ve been if you kept things [inflation and wage growth] stable all along. That’s why the Fed’s new woke rhetoric in 2021 was so dangerously misguided. - April 4, 2022
Many other experts agree with him, and history suggests the Fed is in tough spot.
Let’s start with some facts.
One year of higher inflation after a decade of low inflation is not the same as a decade of high inflation.
The fast recovery from the Covid-recession is good for American families and businesses. Consumer spending is back on trend even with the higher prices. Same with business investment. In contrast, the Great Recession was terrible.
Consumers are not buying in advance because they expect higher prices, unlike in the 1970s. There are no signs of consumers adopting an inflationary mindset.
Source: Surveys of Consumers. The University of Michigan.
Let’s focus on the future.
We must be vigilant. The Fed must act to bring inflation down. It is! And it has the full support of the White House and Congress. No guarantees of success. People’s beliefs can change quickly. Feelings matter. And the world has been cruel the past few years. That said, it’s not time to throw in the towel and accept a recession. No!
Below the paywall, I explain that the Fed’s thinking and actions in the 1970s are not comparable to the current crisis. We have learned many lessons from the past, and it’s clear that Fed officials are applying those lessons as best they can today.
Times change. I know. Here’s me at Rocky Horror in Madison in 1996. We must face that change and solve the problems it serves up. Keep moving.
I appreciate your support of my Substack and your patience with my limited paid-only content. Please send me suggestions or questions about the Fed to address. stayathomemacro@gmail.com.
My views here are my own and do not represent anyone else.
Finally, here’s a snippet from below the paywall, which is a dive into FOMC meeting transcripts from the 1970s. It shows how different the Fed is now.
I am floored at the vagaries that passed communication policy. Here’s January 1973:
Mr. Mitchell asked, with respect to the upper limit of 6-3/8 per cent for the funds rate, whether the Chairman was suggesting that the Desk probe toward that level immediately.
In reply, Chairman Burns said he would not want to see the Desk take steps that would firm money market conditions on the first day after the Committee's meeting, thereby giving clear signals that might benefit market participants; he preferred to maintain a degree of uncertainty about the course of policy.
Compare that to Jay Powell and numerous Fed officials clearly telegraphing a 50 basis point move at the next meeting in May and “expeditious” increases after that. The last thing the Fed wants to do is inject uncertainty into the world now. Smart.
Much more from the transcripts below the paywall.
I appreciate your support of my Substack and your patience with my limited paid-only content. Going forward, I aim to write one private post per week and one public one. Please send me suggestions or questions about the Fed to address. stayathomemacro@gmail.com.
My views here are my own and do not represent anyone else.