Marcus Nunes has a nice post comparing the views of Janet Yellen and Martin Feldstein. I noticed that Feldstein is worried that we are going to repeat the mistakes of the 1960s.
Experience shows that inflation can rise very rapidly. The current consumer-price-index inflation rate of 1.1% is similar to the 1.2% average inflation rate in the first half of the 1960s. Inflation then rose quickly to 5.5% at the end of that decade and to 9% five years later.
Before we consider whether we are likely to repeat the mistakes of the 1960s era Fed, let’s review precisely what those mistakes actually were. Here’s the data as of November 1966:
Unemployment rate = 3.6%, and falling.
Inflation = 3.6% over previous 12 months. That’s a big increase from the 1.7% of the 12 months before that, and the 1.3% inflation rate two years previous. The “Great Inflation” began here.
The fed funds rate was 5.76%.
Hmm, what should the Fed do in a situation like this? Inflation is beginning to accelerate. Unemployment is near all time lows for peacetime. Decisions, decisions. You’ve taken EC101, what do we do next?
The answer is easy. The Fed decided the economy needed a massive emergency jolt of easy money. By December 1966 the fed funds rate was cut to 5.40%. By January 1967 the rate was cut to 4.94%. By April it was cut to 4.05%. By October 1967 it’s at 3.88%. Keep in mind NGDP was rising at 6% to 8% throughout the late 1960s. If you prefer the monetary base as your “concrete steppe”, that indicator started growing much faster as the 1960s progressed.
Now read the minutes of September 2008, when the Fed refused to cut rates in the midst of the mother of all financial panics because of inflation worries, despite TIPS spreads showing 1.23% inflation over the next 5 years, and commodity prices plunging. Does this seem like a Fed that would slash interest rates much lower when inflation is soaring above target and unemployment is 3.6%?
PS. Keep this data in mind when some fool tells you that the Great Inflation was caused by oil shocks or the Vietnam War or budget deficits or unions, or some other nonsense.
PPS. The economics profession (with a few exceptions) was complicit in the crime of 1966. The Fed generally does what the consensus thinks it should do. The “best and the brightest,” the VSPs. Still think it’s impossible that the entire profession could have been as crazy in 2008-09 as I claim they were? How will the Fed’s behavior in 2008 look 50 years later? I’d say about like the 1966-67 Fed looks today. Out of their ******* minds. And then there’s the ECB . . .
PPPS. One economist that did understand what was going on was Friedman. I find this (from an Edward Nelson paper) to be amusing:
From April 1966 to the end of the year, the evidence of monetary policy tightening started appearing uniformly across monetary aggregates; the “credit crunch” of 1966 is also evident in other financial indicators and is widely recognized as a period of monetary tightness (Romer and Romer, 1993, pp. 76−78). The Federal Reserve would shift to ease in 1967, and that easing marked a dividing point for Friedman. He would classify 1967 as the beginning of an extended departure from price stability, one in which monetary policy fitted the pattern he had laid out in 1954: an inflation roller-coaster around a rising trend, with the occasional deviations below that trend reflecting shifts to monetary restraint that were abandoned once recessions developed (M. Friedman, 1980, p. 82; Friedman, 1984, p. 26).
The FOMC did not, however, appreciate the scale of its easing during 1967. By explicitly associating high nominal interest rates with tight policy, Committee members and other Federal Reserve officials neglected the distinction between real and nominal interest rates. Friedman, in contrast, was pressing this distinction on policymakers. Chairman Martin could not ignore the criticism, not least because Friedman had attracted the interest of Martin’s Congressional interlocutors. Friedman’s revival of the Fisher effect was referred to when Martin appeared at a February 14, 1968, hearing of the Joint Economic Committee (1968, p. 1980):
Senator SYMINGTON. A famous economist has developed the theory that easy money creates higher interest rates. If you have not examined that concept, would you have someone on your staff do so? It is an interesting theory. I discussed it with the economist in question only last week. Would you have somebody look into it?
Mr. MARTIN. I will be very glad to.
The “famous economist” was, of course, Friedman.
In 2008 no senator asked Bernanke to look into the theory of an obscure Bentley economist that low interest rates are often a sign that money has been tight.