It is time to reassess the legacy of Arthur Burns, a much-maligned central banker
Save time by listening to our audio articles as you multitaskIt is not that this warning from history is incorrect. Richard Nixon picked Burns to run the Fed, viewing him as a friend who would do his bidding. Despite stubborn inflation, Nixon pressed Burns to cut interest rates in 1971, thinking it would help him win re-election. Sure enough, the Fed did just that. Nixon was re-elected and inflation soared, hitting double digits by 1974.
Start with what happened after inflation took off. The Fed jacked up interest rates from 3% in 1972 to 13% in 1974, one of its sharpest-ever doses of tightening, and enough to help tip the economy into a deep recession. Doing so took some of the heat out of price growth, with inflation settling at around 6% for the remainder of Burns’s tenure. This was uncomfortably high, and Burns never delivered the death blow to inflation that Paul Volcker did in the early 1980s.
Burns’s troubles also illustrate the pitfalls of real-time indicators. The Fed today is seen as “data-dependent”. If inflation momentum stays relatively weak, its next rate rise is likely to be one quarter of a percentage point; if inflation shoots back up, a half-point rise may be on the menu. That is entirely reasonable. But consider the head-fake of 1975. Initial data from the first quarter registered a 10% annualised drop inand a remission in price pressure. The Fed cut rates aggressively.
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