Timiraos: Fed Wary Of Repeating 1970s Error

| |

Were the Fed to ease because of growth fears before inflation has been vanquished, it would risk repeating its stop and go tightening of the 1970s, which economists now see as a costly policy error – Nick Timiraos, “Fed Wary of Repeating 1970s Error” [SUBSCRIPTION REQUIRED], WSJ A2, Monday July 11

Nick Timiraos wrote an important piece in today’s WSJ about how the Fed is wary of repeating its 1970s errors. In the 1970s, the Fed engaged in “stop and go” tightening in which it raised interest rates to combat inflation, which hurt economic growth, which caused it to lower interest rates, which caused inflation to perk up again, which caused it to raise interest rates again, etc… Ultimately, it neither tamed inflation nor shored up economic growth. In his article, Timiraos quotes a number of Fed insiders to the extent that the Fed will not repeat that mistake.

However, what I think Timiraos and the insiders fail to understand is that the economy is in a much more precarious position than it was in the 1970s. Pulling off Volcker 2.0 will involve even more pain than it did then. Perhaps the Fed will have the fortitude to do so, but I’m skeptical.

Similar Posts