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Memories of the 1970s haunt the Fed, pushing its aggressive rate moves: NPR


President Jimmy Carter signs emergency natural gas legislation in the Oval Office of the White House in Washington, DC, in 1977.

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Memories of the 1970s haunt the Fed, pushing its aggressive rate moves: NPR

President Jimmy Carter signs emergency natural gas legislation in the Oval Office of the White House in Washington, DC, in 1977.

ASSOCIATED PRESS

The Federal Reserve is accused of having poured a lot of cold water on the American economy.

But the Fed is doing so in hopes of stifling high inflation, before it ignites a long-smoldering dumpster fire. “The longer the current episode of high inflation continues, the more likely higher inflation expectations are to persist,” Fed Chairman Jerome Powell said last week.

It’s a lesson born out of the country’s painful experience with runaway prices in the 1970s, when Americans sported “Whip Inflation Now” buttons on their wide lapels.

“I came of age and studied economics in the 1970s and I remember what those terrible times were like,” Treasury Secretary Janet Yellen told a House subcommittee l ‘last year. “Nobody wants to see this happen again.”

Yellen and Powell initially misjudged the resilience of inflation. They believed it was the temporary product of supply shocks related to the pandemic and pent-up consumer demand and that prices would stabilize quickly. Instead, prices continued their rapid ascent for a year and a half.

Now Powell is determined to stifle inflation with higher interest rates and avoid the kind of decade-long price spiral that has haunted presidents from Richard Nixon to Jimmy Carter.

The 1970s were marked by oil shocks that led to soaring gasoline prices. Meat prices have also risen. On the popular sitcom All in the familyArchie Bunker was reduced to eating meatless spaghetti.

Memories of the 1970s haunt the Fed, pushing its aggressive rate moves: NPR

In this Dec. 23, 1973, file photo, cars line up in two directions at a New York gas station.

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Memories of the 1970s haunt the Fed, pushing its aggressive rate moves: NPR

In this Dec. 23, 1973, file photo, cars line up in two directions at a New York gas station.

Marty Lederhandler/ASSOCIATED PRESS

Prices actually started to climb in the mid-1960s when the federal government was spending heavily on the Vietnam War and the Great Society. Nixon temporarily froze prices in the early 1970s, but that only postponed the pain. When his controls were lifted, prices rebounded even higher.

Gerald Ford declared inflation “public enemy number one”. Carter called it the country’s most pressing domestic problem.

Despite tough talk from the White House, prices continued to climb.

Princeton economist Alan Blinder said psychology was partly to blame. In the 1970s, Americans came to believe that high inflation was here to stay. And that expectation has become a kind of self-fulfilling prophecy.

“If you are a business and you expect the inflation rate to be 5%, you are likely to set prices for next year. [to] increase 5%,” said Blinder, who was a vice chairman of the Federal Reserve in the 1990s.

“On the other hand, if you think inflation is going to be 1%, you’re more likely to go up 1%,” he added.

In the end, it took a crackdown from cigar-biting Fed Chairman Paul Volcker to break the cycle of rising prices and wages. Volcker dampened the economy by raising interest rates to 20% – harsh medicine to prove he was serious about controlling inflation.

“At some point that dam is going to break and the psychology is going to change,” Volcker told the MacNeil/Lehrer NewsHour.

It worked. By 1983, inflation had fallen to just over 3%.

It was a painful correction. Nearly 4 million people lost their jobs in back-to-back recessions in the early 1980s. But for the next four decades, inflation was not a serious problem in the United States – until the pandemic strike, followed by the war in Ukraine.

In June, the annual inflation rate reached 9.1%, the highest since the early 1980s. The Fed responded by raising interest rates five times this year, in an attempt to reduce demand and bring prices under control.

“The record shows that if you postpone this, the delay will only make the pain worse,” Powell told reporters last week.

One thing that works in the Fed’s favor is that high inflation is not yet baked into most people’s thinking, as it was in the 1970s. Surveys show that most people are expect prices to stabilize again in the coming years.

“If people believe that prices will be stable enough, then they will be – because they won’t be asking for very big wage increases and people who are selling things won’t be asking for big price increases,” he said. Powell. morning edition. “Once this psychology sets in, it tends to perpetuate itself.”

Blinder agrees that the decades of stable prices since the 1970s should help prevent another inflationary spiral in the future.

“I think the generation that was grown up during that time of high inflation will always remember that,” Blinder said. “But there are a lot of Americans who have never lived with inflation. So naturally they don’t expect it.”


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