Political Pressures on Monetary Policy During the US Great Inflation

Abstract

Drawing on an analysis of Federal Open Market Committee (FOMC) documents, this paper argues that political pressures on the Federal Reserve were an important contributor to the rise in inflation in the United States in the 1970s. Members of the FOMC understood that a serious attempt to tackle inflation would generate opposition from Congress and the executive branch. Political considerations contributed to delays in monetary tightening, insufficiently aggressive anti-inflation policies, and the premature abandonment of attempts at disinflation. Empirical analysis verifies that references to the political environment at FOMC meetings are correlated with the stance of monetary policy during this period. (JEL D72, E32, E52, E58, N12)

Monetary/Fiscal Policy Mix and Agents' Beliefs

“…On the one hand, the interest rate increases but in ‡ation does not fall. On the other hand, as documented for example by Weise (2012) using FOMC minutes and transcripts, it was widely recognized that these disin ‡ationary attempts were hindered by political pressures from the administration at that time who wanted much more gradual approaches to price stability. As an e¤ect, Weise (2012) documents how in both cases, the more contractionary strategy was then abandoned as politically unfeasible and a much more middle ground policy was adopted.…”

“…Jimmy Carter's victory in the 1976 presidential election, a campaign during which he had criticized the Fed for not following a stronger expansionary monetary policy, sets up an even weaker political support for …ghting in ‡ation. This lead Arthur Burns and William Miller (Chair of the Board of March 1978-August 1979, as documented by Weise (2012) and Wells (1994), to express dread at the thought that the Fed would be forced to take on in ‡ation by itself. Instead, they looked to the Administration to take the lead in controlling in ‡ation.…”

“…Samuelson (2008) recalls that di¤erently from the previous disin ‡ation attempts, he refused to criticize the Fed chairman publicly, to urge a lowering of interest rates, or to work behind the scenes to bring that about. 13 Backed by this strong political support, the monetary 11 For example, in March 1978 Miller worried that "time is very short for them [the administration] to take some more believable steps in …ghting in ‡ation and if it's not done, in ‡ation is going to be left to the Federal Reserve and that's going to be bad news" (Weise (2012)) 12 For example, in early 1980 Carter was asked at a press conference what he planned to do about in ‡ation. He replied, "It would be misleading for me to tell any of you that there is a solution to it."…”

Does Anyone Listen when Politicians Talk? The Effect of Political Commentaries on Policy Rate Decisions and Expectations

“…A large literature has studied the Federal Reserve's experience over time. 2 Weise (2012) finds evidence of time-inconsistent policies and argues that the U.S. great inflation of the 1970s was caused, in part, by political pressure resulting in over-expansionary monetary policy. Examining FOMC minutes and transcripts, he finds the political environment led the Federal Reserve to prematurely abandon anti-inflationary monetary policy in 1970, 1973, and 1974.…”

“…This possible susceptibility to political pressure has been a popular topic of investigation for many decades, for both the United States (for example, see Weise, 2012;Hellerstein, 2007;Havrilesky, 1995Havrilesky, , 1988Allen, 1986) and the euro area (for example, see Maier, 2002;Maier, Sturm, and de Haan, 2002;Maier and Bezoen, 2004).…”