blinder3_ Win McNameeGetty Images_jerome powell Win McNamee/Getty Images

The Use and Abuse of Inflation History

For months, many macroeconomic observers have been likening Federal Reserve Chair Jerome Powell’s unenviable position to that of Fed Chair Paul Volcker in the early 1980s. But the differences between the two eras are greater than the similarities – and all of them make Powell’s job relatively easier.

PRINCETON – George Santayana famously observed that, “Those who cannot remember the past are condemned to repeat it.” But allow me to offer a corollary: Those who misremember the past may be led into error by misreading history.

Case in point: Many observers of the US Federal Reserve’s current policy predicament – which is similar to the predicament facing other central banks around the world – have drawn parallels to the problems that Chair Paul Volcker and the Fed faced in the early 1980s. The implication (if you buy the parallel) is that bringing inflation to heel will require much higher interest rates, a lot of pain, and probably a deep recession.

To be sure, parallels do exist. US inflation over the last 18 months or so has been the highest since the Volcker era. The public has been greatly distressed by rising prices, as it was back then, making inflation the number one economic problem. And, as in the 1970s and early 1980s, the economy has been buffeted by a series of adverse supply shocks to food and energy prices. But comparing current Fed Chair Jerome Powell’s task to Volcker’s reveals that the differences are greater than the similarities – and all of them make Powell’s job relatively easier.

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