Nothing Like The 1960s?

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by: Scott Sumner

Commenter Michael Sandifer left this comment:

One key difference between the current period and '66 is that inflation is tame.

He's referring to our relatively low inflation:

Screen Shot 2018-10-11 at 10.00.17 AM Over the previous 6 years, unemployment has fallen from 8% to 3.7%. Inflation has mostly stayed in the 1% to 2% range, occasionally dipping below 1%, and recently rising above 2%.

In contrast, here's the picture as of mid-1966:

Screen Shot 2018-10-11 at 10.02.27 AM In this case, unemployment rose to a peak of 7% in 1961, then gradually trended down to 3.8% in mid-1966. Inflation mostly stayed in the 1% to 2% range, occasionally dipping below 1%, and recently rising above 2%.

Hmmm, that sounds familiar.

I don't expect the next 3 years to look anything like the late 1960s. But if we are to avoid a repeat of the 1960s, it will not be because the current situation is radically different from 1966, it will be because we take steps right now to make sure that the future situation is radically different. And that requires a dramatically less expansionary monetary policy than what the Fed adopted in 1966-69.

In the 1960s, the Fed tried to use monetary policy to drive unemployment to very low levels. Let's not make that mistake again. Better to produce stable NGDP growth, and let unemployment find its own natural rate.