…And the Rates Went Up.
US Monetary Policy- 1976-1979
The period from December 1976 to November 1979 saw one of the Federal Reserves most pronounced and expansive uses of monetary policy. During those three years, the Federal Reserve increased the federal funds rate from 4.75% to 15.5%. The change was effected through a series of 32 rate hikes. Concurrently, the Discount Rate was raised from 5.75% to 12%. These changes can be explained by examining the economic and political climate associated with the time period.
The most notable political change took place in 1976 with the election of Jimmy Carter. During his tenure in office, Carter would affect monetary policy through the appointment of several board members, most notably Paul Volcker (chairman of the Fed appointed in 1979). Although Carter can be blamed for poor use of economic policy later in his term, when he took office in 1977 the country was already in the midst of turbulent economic conditions. Beginning with the oil-shock in 1973 the rate of inflation in the US began to rise. This rate would continue to do so during the rest of the decade. Although 1976-1979 saw a combined growth in real GDP of 18.4% (averaging about 4.6% per year), this change was coupled with high inflation and a depreciating US dollar. The unemployment rate for the period was also high, averaging about 7%. Given these conditions, the Federal Reserve appears to have pursued an appropriate policy: raising interest rates in hopes of controlling inflation and bringing the economy to a more equitable rate of growth.