Photo above: President Richard Nixon. Courtesy National Archives. Right: Statue of Secretariat at Belmont Park, 2014, courtesy Wikipedia Commons.
Click here to Sponsor the page and how to reserve your ad.
1979 - Detail
October 6, 1979 - The Federal Reserve system changes its monetary policy goals from interest rate based to a money supply target orientation.
The Federal Reserve System was established on December 23, 1913, to regulate monetary policy and forestall and limit such events as the Great Depression of the 1930's or the Great Recession of the 2008's. During that time, its role has expanded in response to various crises in order to keep the monetary supply of the United States stable. It had three key objectives from the start; to keep employment high, stabilize prices, and moderate long-term interest rates. That has expanded to include bank regulation, stability of the financial system, and financial services to banks and the government. It is considered an independent government institution, its policies not subject to approval by the President or Congress.
In 1979, inflation during the Carter administration roared. Paul Volcker was nominated by the President to be the Chairman of the Federal Reserve and took office on August 6, with part of his mandate to control rampant inflation and price increases that were destabilizing the housing market as well as the economy in general. The Federal Reserve had been using a confusing control of money supply policy in the late 1970's, which were not taming the inflation pattern. It was also weakening the dollar and raising the money supply. At a special meeting called by Volcker on October 6, 1979, the Federal Reserve Board of Governors announced that to combat inflation, they would change their goals to "money aggregates" and bank reserves instead of interest rates. Money aggregates were defined as the total amount of money supply in the nation, including paper and coin, check and demand deposits, money market plus major time deposits over $100,000, plus institutional funds.
How Did the Change Impact Inflation?
When the policy change took effect, the inflation rate of October 1979 was 12.07%, caused by a spike in oil and food prices, but also the general economy. Unemployment was 5.8% during the first nine months, low compared to the recession levels of 1974-5. Inflation would rise through the end of 1979 and into June of 1980, peaking at 14.38%. Over the next two years, rates stabilized, dipping to 3.83% by December 1982.
Was the change considered good? In the short run it led to higher interest rates and the recession of 1980, plus a record Federal Funds rates of 17.6%, then 19% in June 1981. A second recession occurred with unemployment reaching 11%. Eventually the policies took hold, with additional requirements for credit restraint and special reserve requirements part of the Federal Reserve and government policy equation. Overall, the new policy would break the back of high interest rate patterns, leading to low inflation in the years past 1982.
The action taken by Volcker and the Federal Reserve gets general credit as establishing the control of inflation as the number one target and mission of the Federal Reserve. Despite that, when interest rates dipped to 1% in 1987, the Federal Reserve abandoned the "money aggregate" policy that had worked since 1979 as a guideline to control inflation.
Photo above: Eccles Building, home of the Federal Reserve, Washington, D.C., circa 1937-1950, Theodor Horydczak. Courtesy Library of Congress. Photo below: View of the Washington Monument from the Federal Reserve Building, 1937, Harris and Ewing. Courtesy Library of Congress. Source Info: Federal Reserve Bank; Investopedia.com; Inflationdata.com; frbsf.org letter, December 3, 2004; Wikipedia Commons.