PHOTOGRAPHER: J. SCOTT APPLEWHITE/AP PHOTO
Donald Trump’s repeated public criticism of the Federal Reserve’s monetary policy seems extraordinary, but he isn’t the first president to oppose raising rates. Paul Volcker, 91, has had firsthand experience with this, both in Lyndon Johnson’s Treasury Department and as Fed chairman during the Reagan administration, as he recalls in Keeping at It: The Quest for Sound Money and Good Government (Oct. 30, PublicAffairs), written with Bloomberg Markets Editor Christine Harper. Volcker, who was Fed chairman from 1979 to 1987, is credited with ending an era of double-digit inflation by pushing short-term rates as high as 20 percent.
Later in the fall of 1965, Treasury Secretary Henry Fowler became deeply concerned about a warning he had received from Fed Chairman William McChesney Martin. The Fed planned to raise its discount rate, the rate the Fed charges banks for short-term loans, with the presumed effect of raising all market rates. Martin’s clear aim was to forestall inflationary pressures as Vietnam War spending rose in an already fully employed economy. A spirited internal debate developed. The Council of Economic Advisers and the Bureau of the Budget lined up with Fowler in pleading for delay. Privately, I was sympathetic to Martin’s argument and hoped to persuade the secretary into a compromise: perhaps a quarter-percentage-point increase instead of the planned half-point.
The unfortunate result for me was the creation of a four-man ad hoc committee to examine the issue. The composition was odd. Although I was the Treasury’s representative, I was eager to compromise. Dan Brill, the Fed’s research chief, was strongly opposed to any rate hike despite his boss’s view. So were, in varying degrees, representatives from the CEA and the Bureau of the Budget (now the Office of Management and Budget). Predictably, we concluded that the decision could wait until January so it could be coordinated with the new budget.
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This Isn’t Your Grandfather’s (1960s) Inflation Scare
March 14, 2018
This Isn’t Your Grandfather’s (1960s) Inflation Scare
As soon as the GOP followed its long-promised tax cuts with damn-the-deficit spending increases (who cares about the kids, right?), you knew to be ready for the Lyndon B. Johnson reminders.
And it’s worth remembering that LBJ pushed federal spending higher, pushed his central bank chairman against the wall (figuratively and, by several accounts, also literally) and eventually pushed inflation to post–Korean War highs.
Inflation kept climbing into Richard Nixon’s presidency, pausing for breath only during a brief 1970 recession (although without falling as Keynesian economists predicted) and then again during an attempt at wage and price controls that ended badly. Nixon’s controls disrupted commerce, angered businesses and consumers, and helped clear a path for the spiraling inflation of the mid- and late-1970s.
So naturally, when Donald Trump and the Republicans pulled off the biggest stimulus years into an expansion since LBJ’s guns, butter and batter the Fed chief, it should make us think twice about inflation risks—I’m not saying we shouldn’t do that.
But do the 1960s really tell us much about the inflation outlook today, or should that outlook reflect a different world, different economy and different conclusions?
I would say it’s more the latter, and I’ll give five reasons why.
1—Technology
I’ll make my first reason brief, because the deflationary effects of technology are both transparent and widely discussed, even if model-wielding economists often ignore them. When some of your country’s largest and most impactful companies are set up to help consumers pay lower prices, that should help to, well, contain prices.
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