- ORIGINAL NEWS
‘The Fed has made two major mistakes in its history,’ expert says. Here’s how those affect policy today
- SUMMARY
The Federal Reserve (Fed), the central bank of the United States, is preparing to lower interest rates to stimulate the economy.
However, experts caution against premature action, citing historical missteps that led to prolonged inflation.
Specifically, the Fed’s error in the late 1960s by prematurely easing monetary policy paved the way for the high inflation of the 1970s.
Similarly, in the early 1930s, the Fed’s failure to prevent widespread bank failures contributed to the severity of the Great Depression.
Today, the Fed faces a balancing act.
While it must address elevated inflation, it also wants to avoid triggering a recession.
Inflation remains persistent, and the Fed believes that lowering interest rates prematurely could reignite inflationary pressures.
In the late 1970s and early 1980s, former Fed Chairman Paul Volcker had to implement aggressive interest rate hikes to combat runaway inflation.
While successful in reducing inflation, these measures also caused a deep recession and housing market collapse.
Fed Chairman Jerome Powell is determined to avoid repeating Volcker’s experience.
He has acknowledged the mistakes of the past and indicated that the central bank will proceed cautious.ly, even if it means keeping interest rates higher for an extended period.
Experts believe that the Fed is taking the lessons of history to heart and will prioritize bringing inflation under control without prematurely loosening monetary policy.
By proceeding gradually and carefully, the Fed aims to engineer a “soft landing” for the economy, avoiding both a sharp slowdown and a resurgence of inflation.
- NEWS SENTIMENT CHECK
- Overall sentiment:
neutral
Positive
“Slowly but surely, recessionary talk is dying down and confidence in the Federal Reserve is picking up.”
“The central bank is likely to remain extremely cautious, Higgins said, even if that means holding rates higher for longer.”
Negative
“However, if history is any guide, there would likely still be some significant economic disruptions before this period of elevated inflation is over, according to Mark Higgins, senior vice president for Index Fund Advisors and author of “Investing in U.S. Financial History: Understanding the Past to Forecast the Future.””
“By the early 1980s, prolonged high inflation had become so entrenched, Paul Volcker, then Fed chair, had to get even more aggressive to tighten the money supply.”