What Jerome Powell Can Learn From Arthur Burns

The 1970s Fed chairman choked when recession hit. Inflation persisted, and then he blamed Congress

By Thomas J. Sargent and William L. Silber. Excerpts:

"The 11% annual inflation of 1974 was the first installment of double-digit annual price increases of the decade. Some macroeconomists labeled that year’s inflation transitory, citing shortages of food and energy as the main offenders. Ignoring those arguments, Burns tightened credit sharply to restrict demand, raising the overnight interest rate to more than 12% by mid-1974. That monetary restraint temporarily cut inflation in half, but subsequent Fed actions allowed it to grow again. The recession that developed in 1974 increased the unemployment rate to about 9% from 5%, and Burns responded by quickly cutting the short-term interest rate in half. But after that he never raised interest rates high enough to curb accelerating prices and regain the upper hand in battling inflation."

"in a public lecture after he left office in 1978, Burns admitted that under his leadership the Federal Reserve’s “restrictive stance was not maintained long enough to end inflation.”"

"figuring out what “long enough” means is challenging and depends on how inflation and the economy evolve."

"The Fed tries to explain forward guidance by saying that each member’s projection is “based on information available at the time of the meeting, together with her or his assessment of appropriate monetary policy.” But that description explains neither whether those projections are a forecast or a policy preference nor how they depend on inflation, economic growth and unemployment. Forward guidance is supposed to be informative but often fails to provide clarity and sometimes misleads. At the press conference following the Fed’s July policy meeting, Mr. Powell announced a temporary suspension of forward guidance. He should make it permanent."

"the purpose of the Fed’s tight credit is to offset the inflationary effects of the expansionary monetary and fiscal actions of 2020 and 2021"

"America suffered a decade of inflation because Burns failed to do enough, soon enough and for long enough. Mr. Powell can avoid repeating those errors."