Industrial Insight

Comparing now with the 80’s | October 7, 2010

http://online.barrons.com/article/SB50001424052970203599504575535863046936590.html?mod=BOL_hpp_dc

Up and Down Wall Street

| WEDNESDAY, OCTOBER 6, 2010

Coming Full Circle on Monetary Policy

By RANDALL W. FORSYTH

On Oct. 6, 1979, the Federal Reserve embarked on a fierce campaign to restore the dollar’s value, both in terms of inflation at home and in the global currency markets. It meant extreme actions, culminating in short-term interest rates reaching the unprecedented heights of 20%. The U.S. economy sank into what then was the worst contraction and the longest period of sustained 9%-plus unemployment since the Great Depression. Once inflation was finally crushed, the economy embarked on the longest expansion ever known, interrupted only by two trivial recessions until the great credit collapse beginning in 2008.

Since then, monetary policy has been the polar opposite—short-term rates cut to an irreducible zero; massive Fed asset purchases to push down yields on intermediate- and long-term Treasuries and especially mortgages; and now, stimulus through a lower dollar, albeit unofficially. The aim has been to arrest a decline in inflation that now has been explicitly deemed as too low—which couldn’t be much more different than 31 years ago. And while the U.S. economy emerged from the worst recession since the Great Depression, unemployment remains elevated above 9% for the longest stretch since the 1930s.

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