A recent Bloomberg story cited the Federal Reserve's concerns about prematurely tightening monetary policy too soon, because it could lead to a repeat of the 1937 flip-flop monetary debacle.
As you may recall, the economy was slowly emerging from the Great Depression in 1937, when the money supply began to shrink. The Fed then flip-flopped by trying to loosen its monetary policy and lowering the discount rate to 1% from 1.5% in 1937. Apparently, the Fed is now concerned a flip-flop would again be needed if it were to raise interest rates next year. But that concern is unjustified.
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Today, the unemployment rate is at 5.8%. In 1937, it was never below 14%.
Today, the Fed funds rate has been set at zero for six years and the discount rate at which it lends money overnight to banks is at 0.75%. In 1937, the discount rate was at 1.5%.
And in 1937, the Fed actually eased policy in the face of rising unemployment and lowered the discount rate to 1%. Therefore, policy is easier today and the unemployment rate is much lower than it was in 1937.
I'm all for looking to history for guidance, but the history needs to be relevant. Comparing 1937 to today's environment is about as relevant as comparing monetary policy to the last time the Cubs won the World Series.
Today, if anything, is more like 2003. That's when regulators ignored financial sector risks and the Fed kept rates too low for too long, inflating the housing bubble. That eventually led to unemployment spiking at 10%.