As in the late '70s and early '80s, the inflation facing the U.S. now is proving difficult to quash—but experts say that's where the similarity ends.
Despite the Federal Reserve actively working to fight higher prices, inflation remained stubbornly high at 8.3% year-over-year ending in August. In response, on Sept. 21, the Federal Open Market Committee (FOMC) raised the Federal Funds rate by another 75 basis points (three-quarters of a percentage point) to a target range of 3% to 3.25%.
Raising that rate, which is what banks charge each other to lend money, generally makes borrowing money more expensive for everyone—consumers and businesses alike. In theory, the more expensive it is to borrow, the less consumers and businesses will spend, which reduces demand and should drive down prices.
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Today's Fed "taking ownership" of inflation
Throughout the year, the Federal Reserve has repeatedly affirmed its commitment to lowering inflation to its 2% target. In a recent speech, Chair Jerome Powell called price stability the Fed's responsibility and "the bedrock of our economy."
"Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them," Powell said.
This speech itself—and others like it—as well as the Fed's openness about its responsibility show just how far today's Federal Reserve has come, experts said.
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BOK Financial
The fact that Powell and other FOMC members are vocalizing the Fed's duty to fight inflation also makes today's Fed different from the Fed of four decades ago, Henderson said.
"The Fed oftentimes didn't take full responsibility for its mandated goal of stable prices, often blaming other institutions or emphasizing it didn't have the tools to control the inflation," he explained. "For instance, they would point to their lack of ability to control the energy supply or commodity prices."
Today's Fed is also contending with factors outside of its control—such as the war in Ukraine and China's Zero-Covid Policy—that are driving up prices. However, what makes this Fed different is that it's acknowledging these influences and yet still staying committed to the idea that achieving 2% inflation is within its reach, Henderson and Wyett said.
No stop-and-go approach
The fact that today's Fed is, so far, staying on course also shows that members learned some lessons from their predecessors' approaches.
"They're not going to have a stop-go monetary policy like we saw then," Henderson said. "Back in the 70s and 80s, the Fed would hike rates a lot, see inflation come down, so start cutting interest rates. But then they would have to turn around and reverse that and rates would go up a lot more. Then, they would pause and rates would head back down and then back up."
Based on the Fed's communication this year, their approach to inflation is different now. As Henderson said, "The Fed will continue to tighten monetary policy until its job is done."
But that doesn't mean that the sky-high interest rates of the '80s are on the horizon, he said.
"The environment would have to change so dramatically from where we are today for that to be a possibility," Wyett said. "One of the biggest differences between then and now is that the total national debt in 1982 was about $1 trillion. It's $31 trillion now, so higher rates have a lot bigger impact today because there's a lot more debt outstanding than there was in 1982.
"And that higher debt just means that as you raise those rates, it will slow the economy faster."
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