The Federal Reserve Board of Governors eventually raised interest rates. On March 16, the central bank announced that interest on reserve funds would be 0.4%. Foreign currency banking will keep interest rates within a range of 0.25-0.5%.
In addition, officials have indicated that several more interest rate hikes are coming this year, possibly six in total.
This is the first interest rate hike since the end of 2018. This rate hike came after almost a decade of near-zero rates, to rebuild following the huge global financial crash and the 2007-2008 recession.
Then the pandemic hit. The Fed lowered its rates again.
As the serious global health challenge fades, government officials have more leverage to raise rates. More normal times facilitate, if not demand, a return to more normal policies if the government is to be responsible.
However, as the biological public health problem faded, a very serious economic health problem suddenly appeared: inflation. Moreover, this new threat is not just on the horizon; the price plague is here among us.
Everyone is now suffering at the gas pump, in the grocery store, all the way through buying the array of necessities – and amenities – that are part of life as we live it. know, in an economy comfortable for the majority. Along the same lines, people in the rest of the world are approaching and enjoying this type of desirable way of life.
The media usually responds by expanding on the mantra that comparable inflation happened in the early 1980s. This is a misleading simplification of a challenge that has gone on for years.
In the late 1950s, economist William Phillips of the London School of Economics discovered a strong inverse correlation between inflation and unemployment. He himself did not conclude that it was some kind of iron law to guide policy, but others have.
A belief based on the Phillips curve has taken hold in federal fiscal policies. Professor Walter Heller of the University of Minnesota, head of the Kennedy Administration’s Council of Economic Advisers, compared managing the economy to driving a car – you step on the gas or the brakes, depending on the circumstances.
Once again, as throughout history, human behavior has undermined assumptions. In the late 1960s, inflation and unemployment rose together.
During the 1960s and 1970s, the problems increased, rapidly. Escalating federal spending and deficits boosted prices. The OPEC (Organization of the Petroleum Exporting Countries) oil embargo and price hikes of 1973 and 1979 fueled the financial fires. High and rising unemployment has failed to bring relief.
President Lyndon Johnson, aided in particular by Secretary of Defense Robert McNamara, misled Congress and the American people about the true costs of the Vietnam War. Good intentions were at least part of the reason.
LBJ did not want to weaken, or even lose, its Great Society. This refers to wildly ambitious spending to build on the New Deal reforms of the Great Depression.
Don’t laugh. Medicare and Medicaid, along with other aspects of today’s comfortable collective living, were part of the package.
Johnson’s successor, Richard Nixon, obsessed with reelection in 1972, aggressively threatened Federal Reserve Chairman Arthur Burns to pursue expansionary monetary policy. The silver faucets poured even more gasoline on the fires of inflation.
Paul Volcker, appointed by President Jimmy Carter to head the Federal Reserve Board, finally broke the back of the inflationary beast with tight monetary policy and high interest rates.
Volcker personifies the gold standard of political leadership.
Arthur I. Cyr is Clausen Professor Emeritus at Carthage College and author of “After the Cold War” (NYU Press and Macmillan). Readers can write to him at [email protected]