Fed could be more aggressive on inflationLetter: Fed could be even more aggressive on inflation

Fed could be more aggressive on inflation

High inflation in America is affecting nearly everyone here. I worked as an economist at the Board of Governors of the Federal Reserve starting in 1985. That was two years after our economy had done an amazing, wonderful turnaround. But it came after some brutal bad times.

In 1981 the U.S. economy had been suffering badly since roughly 1979 with stagflation: high inflation (in 1982 it briefly reached 14%!) with low, stagnant growth. That is when the Federal Reserve under Paul Volcker stepped in. The rates were raised so high that the discount rate reached 20%. Thirty-year mortgages reached 12%.

The leaders at the Fed realized that to "kill" inflation, they needed to stop "inflationary expectations" by consumers. Credit dried up. Two sectors that were especially hard hit were construction and real estate. But the Fed went full steam ahead because in the greatest action by federal government economically in my lifetime, they put long-term economic health ahead of the short run. The benefits took about 18 months to take hold. Rates were kept high until the Fed had undeniable proof that inflationary buying by consumers was gone. Once the Fed began dropping rates, they did so very quickly, and the economy launched: 8% growth in one 12-month period, most of it real growth.

Now I must admit that our economy was much more domestic in nature then. So the same steep rates now may not work quite as effectively. But those actions by the Federal Reserve led to almost 25 years of continuous growth, with two small recessions in between. In my strong opinion, despite the hardships it will cause to millions of people, the Fed needs to continue to pursue big interest rate hikes to strongly lower inflation. The long term (more than 18 months from now, perhaps) benefits will be fabulous: low inflation and continuous growth for many years.

Douglas Griggs, Salem