Vol. 01 – The Volcker shock
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F orty years ago, the Fed pushed the economy into a recession to stop inflation. What lessons can we learn? The calm before the storm Before 1965, US inflation was stable for years, hovering around or below 2%. But President Lyndon Johnson then began implementing big increases in spending, as part of both the war on poverty and the escalating war in Vietnam. While some of that spending was funded by new taxes, much of it wasn’t, leading to higher deficits. Yet, at a time when the economy was near full employment, this policy translated into higher inflation. Furthermore, in 1973, the Organization of the Petroleum Exporting Countries (OPEC) announced an oil embargo on the West, in part as a punishment for US and other nations’ support for Israel in the Yom Kippur War. The price of gas nearly quadrupled between October 1973 and January 1974, contributing to the first of two extreme surges in inflation that decade, and to a relatively long recession ending in 1975. (1)
Marc-Antoine Collard Chief Economist & Head of Research
(1) Dylan Matthews, “ How the Fed ended the last great American inflation – and how much it hurt ”, Vox, 2022
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