James Bullard, Essay: Getting Ahead of U.S. Inflation, A Lesson from 1974 and 1983

“The lesson from these two different approaches to monetary policy is the importance of staying ahead of—rather than getting behind—inflation. In particular, the takeaway is that getting ahead of inflation will keep inflation low and stable and promote a strong real economy.”

“In the 1990s, the FOMC stayed ahead of inflation as it tightened monetary policy following the 1990-91 recession. From early 1994 to early 1995, the FOMC raised the policy rate by 300 basis points (going from 3% to 6%) in an environment where inflation was generally moderate. Similar to the 1983 experience, the associated ex-post real interest rate at that time was high. Again, the result was not a recession but instead an expansion, which lasted until 2001. In fact, one of the best periods for economic growth and labor market performance in the entire post-World War II era occurred in the second half of the 1990s.”