Today the Editorial Board of the Wall Street Journal wrote that the Federal Open Market Committee has shown “little interest in reeling in what has been the most reckless monetary policy since Arthur Burns roamed the Eccles Building.”
Last month I published an article, which Project Syndicate cleverly headlined “Is the Fed Getting Burned Again?” It summarized research consistent with this Wall Street Journal editorial. I presented the research in detail in an April 2021 paper “The Optimal Return to a Monetary Policy Strategy” which I gave at the City University of New York.
This story goes back to memo reprinted in the book Choose Economic Freedom which George Shultz and I published last year (and because we quoted Milton Friedman so much he is a coauthor.) The memo was written fifty years ago (June 22, 1971) from Arthur Burns, who was then Chair of the Fed, to President Richard Nixon. Inflation was picking up, and Burns wanted Nixon and others to understand that the inflation was not due to monetary policy or to any action by the Fed. Instead, Burns recommended “a strong wage and price policy” to Nixon. The memo convinced Nixon, and he instituted a wage and price freeze, and followed up with wage and price controls and guidelines for the whole economy. It was a disaster, and, as the Fed was off the hook, money growth sored, inflation and unemployment got worse for the rest of the decade.
So look at where we are now. Inflation has picked up, and the Fed is saying that it is not responsible for that development. Instead, the Fed argues that today’s high inflation just reflects the bounce back from the low inflation of last year.
And the Fed is more interventionist now than it was in Burns’s day. Its balance sheet is exploding as the Fed purchases massive amounts of Treasury bonds and mortgage-backed securities. M2 growth has risen sharply. The federal funds interest rate is now lower than recommended by many trusted policy rules, including the Taylor Rule, listed on page 44 of the Fed’s most recent July 9, 2021 Monetary Policy Report.
“History hasn’t been kind to Burns” as the Wall Street Journal says in its editorial. It’s not too late to learn from past mistakes and adjust monetary policy. As John Holland of Olathe, Kansas said in a letter to the Wall Street Journal on March 1: “Powell Shouldn’t Repeat Arthur Burns’s Mistakes.”