![]() ![]() ![]() Vanguard’s internal analysis suggests that the Fed’s assumption of a 2.5% neutral rate is about a percentage point too low, and that more concrete measures signal the need for higher policy rates. For today’s Fed it is the neutral rate, the unobserved rate at which monetary policy would be considered to neither stimulate nor restrict an economy. With the benefit of hindsight, we now know that NAIRU back then exceeded 6%. For the Fed of 1967 it was NAIRU, the nonaccelerating inflation rate of unemployment, which suggested then that unemployment rates below 4% didn’t necessarily rule out rate cuts. ![]() ![]() An unfortunate parallel between the late 1960s and today is a reliance on abstract measures that can underestimate the level of monetary policy that promotes a balanced economy. 2: Minimize reliance on the unobservable. Given that the Fed’s effective federal funds rate does not yet exceed certain inflation rates, the summer of 1967 should remind the bond market that entertaining a pivot in 2023 would be ill-advised. The history of disinflationary periods is clear: Rates need to exceed the current rate of inflation for at least a year to pull the trend line down. The lowering of interest rates in the face of a tight labor market opened the door to broader inflation and wage pressures within months. Inflation never declined from its sticky 3% rate during 1967. The Fed’s premature pivot to cutting rates in the summer of 1967 given a growth slowdown was unfortunate. 1: Raise rates well above the current inflation rate and hold them there. But important parallels between 1967 and today offer some lessons for policy makers and the markets. The Federal Reserve has aggressively tightened monetary policy, not loosened it. We’re not on the cusp of another Great Inflation. Though few realized it then, 1967 had been a launchpad for the Great Inflation, the 1965-1982 period of surging prices that required an 18% federal funds rate target to eventually quell. By 1969, inflation had surged above 6% the federal funds rate target, at 9%, was double its 1967 level and recession set in late in the year. Within a year, the economy was overheating again. But that 1967 outcome was in fact a pyrrhic victory, a brief pause leading up to a hard landing. " On Long and Variable Lags in Monetary Policy.Some economists point to 1967 as a guidepost for a similar outcome in 2023. " The Discount Window and Discount Rate." " Reserves Administration Frequently Asked Questions: Elimination of Reserve Requirements - Effective March 26, 2020," Select "Is the elimination of reserve requirements permanent?"īoard of Governors of the Federal Reserve System. " Overnight Reverse Repurchase Agreement Facility."īoard of Governors of the Federal Reserve System. " Open Market Operations."īoard of Governors of the Federal Reserve System. " Interest on Reserve Balances."īoard of Governors of the Federal Reserve System. Louis, FRED. " Effective Federal Funds Rate."īoard of Governors of the Federal Reserve System. " National Rates and Rate Caps."įederal Reserve Bank of St. " About Treasury Marketable Securities."įederal Deposit Insurance Corporation. " Why Price Controls Should Stay in the History Books."Ĭongressional Research Service. " Incomes Policies in the United States: Historical Review and Some Issues," Pages xiii, 32, 47, 62.įederal Reserve Bank of St. " The End of the Bretton Woods System (1972–81)."Ĭongressional Budget Office. " Incomes Policies in the United States: Historical Review and Some Issues," Pages xii-xiii, 52. " Federal Open Market Committee: About the FOMC."Ĭongressional Budget Office. Board of Governors of the Federal Reserve System. ![]()
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