Working Paper Revision

A Comparison of Fed "Tightening" Episodes since the 1980s

Abstract: This article examines how the real economy and inflation and inflation expectations evolved in response to the six tightening episodes enacted by the FOMC since 1983. The findings indicate that the sixth episode (2015-2018) differed in several key dimensions compared with the previous five episodes. In the first five episodes, the data show the FOMC was generally tightening into a strengthening economy with building price pressures. In contrast, in the final episode the FOMC began its tightening regime during a deceleration in economic activity and with headline and core inflation remaining well below the FOMC’s 2 percent inflation target. Moreover, both short- and long-term inflation expectations were drifting lower. These developments helped explain why there was a one-year gap between the first and second increases in the federal funds target rate in the final episode. Another key difference is that in three of the first five episodes, the FOMC continued to tighten after the yield curve inverted; a recession then followed shortly thereafter. However, in the final episode, the FOMC ended its tightening policy about eight months before the yield curve inverted.

Keywords: Federal Open Market Committee; monetary policy; macroeconomy; inflation; yield curves; recession;

JEL Classification: E3; E4; E5; N1;

https://doi.org/10.20955/wp.2020.003

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2022-01-31

Number: 2020-003

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• Working Paper Revision: A Comparison of Fed "Tightening" Episodes since the 1980s