It may be hackneyed to say that history repeats itself, but that doesn’t mean it’s untrue. Look no further than business and interest rate cycles. We’ve all seen charts and tables lately that display the confluence of short- and long-term interest rates, the relationships between fed funds and unemployment, and correlations between mortgage costs and housing prices. As it turns out, exactly one-half century ago, many of the same forces present today in our domestic and global economies were at play. It caused the Federal Reserve to take aggressive and even unprecedented action that would have consequences in the near and intermediate term. There was also a campaign from the White House to drum up public support that, in retrospect, was almost comical. Since we’re at the 50th anniversary of these events, and there seem to be a few parallels today, let’s see what was causing community bankers some heartburn in 1973. Crude References The roots of the economic distress visiting the American people back then was an oil embargo orchestrated by a cartel of Middle East oilproducing countries known as the Organization of Arab Petroleum Exporting Countries (OAPEC). This was in retaliation for what the cartel deemed was the western democracies’ support of Israel in the Yom Kippur War in October 1973. However, the U.S. economy was already on shaky ground prior to the embargo. High levels of deficit spending (by 1970s standards) to help finance the Vietnam War had pushed inflation into the 6% range early in the decade. In response, the Federal Reserve Board, chaired by Arthur Burns, began raising fed funds aggressively. From a starting point of 5.5%, the benchmark overnight rate reached 10% by the end of the year, which was the first time we had ever seen double-digit fed funds. Meanwhile, the stock market was tanking (S&P 500 Index was down 17% in 1973 and another 30% in 1974), partly in response to the oil embargo that went into effect in October. This caused the price of crude oil to skyrocket. With that came increases in overall inflation and concerted efforts by the Fed and the Ford administration (which took office in August 1974 upon the resignation of Richard Nixon) to get prices under control. MONETARY POLICY FOR THE WIN The Fed Was Battling Inflation 50 Years Ago, Too By Jim Reber, President and CEO, ICBA Securities 24 | The Show-Me Banker Magazine
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