Though I was a mere child in the 1970’s, I am well aware of the difficulties facing the public and the economy during that decade. Long lines at gas stations, extremely high inflation, and high unemployment were the most visible problems. During the Ford Administration, buttons were passed out that said WIN – whip inflation now. The current Fed Board of Governors is on a mission, and there’s no doubt that they will whip inflation.
The Fed doesn’t want a repeat of the 1970s or the Great Depression
In 1974, the Fed tried to motivate the public to cut demand. Surprise, surprise: That did not work. When Paul Volcker took the reins as Fed Chair, the Fed took drastic steps to stamp out inflation. As they raised interest rates, inflation eased – but interest rates hiked up to 20% and remained in the double digits for an extended period of time. It was a stunning move, but since 1982, inflation had been rather tame.
It’s hard to believe that over the past decade, the Fed tried to create inflation. It started during and continued after the Great Financial Crisis in 2008, when deflation was a major concern. Former Fed Chairs Ben Bernanke and Janet Yellen worked to create some inflation, move away from a zero interest rate policy, and gently raise interest rates to neutral. That did not work.
Then the COVID-19 pandemic came along, which created an entirely new problem. The Fed flooded the market with liquidity to prevent a second great depression. And here we are.
Today, Chair Jerome Powell has a huge price stability problem. A plan is in place to fix the problem, but the market seems to believe many different scenarios exist (small vs large hikes, few vs many hikes). It’s too early for the Fed to know specifics.
Did Chairman Volcker know the Fed Funds rate would hit 20%? I doubt it, but he did whatever it took to whip inflation (even if it caused twin recessions).
The Fed’s plan to steadily raise rates is the right move, and I believe they will make good on their promise to tame inflation – even if the stock market is fractured for a time.