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short essays and reports on the economic issues of the day
2007 ■ Number 18

The FOMC in 1978
Richard G. Anderson and Charles S. Gascon
he turbulent 1970s tested the resilience of Americans. A recession
Minneapolis, who argued uncertainty about future monetary policy
and stubborn inflation opened the decade; price and wage controls
(and, hence, inflation) was the important factor threatening the pace of
followed. OPEC’s coming-of-age disrupted supplies and raised oil
economic activity—not “tight” monetary policy.
prices; an unpopular foreign war ended in retreat after a declaration of
The FOMC’s actions during 1978 may be seen as attempts to stabilize
victory; and, for the first time in American history, both the president
inflation without undermining business confidence: They increased their
and vice president resigned under threat of impeachment. Against this
federal funds rate target from 6 3/4 percent at the January 17 meeting to
backdrop, the Federal Open Market Committee (FOMC) struggled to
10 percent at the December 19 meeting. The failure of these actions to
temper a rising inflation trend while promoting full employment and
dampen inflation is shown in the chart, which suggests the FOMC’s rate
maximum economic growth.
targets were consistent with the realized 7 to 9 percent inflation rate
The year 1978 marks the transition between moderate consumer
incurred by the economy. ■
price inflation (CPI) during 1976 and 1977 (5.0 percent and 6.6 percent,
respectively) and the more-than-12 percent rates during 1979 and 1980:
In 1978, the rate was 8.9 percent. The year also marks a shift in the social
and political resolve to reduce inflation. At his final public appearance
as Federal Reserve Chairman in January 1978, Arthur Burns expressed
3 Hetzel, Robert. “Arthur Burns and Inflation.” Federal Reserve Bank of Richmond
his frustration: “The need to fight inflation is widely recognized, but the
Economic Quarterly, Winter 1998, 84(1), pp. 21-44.
will to do so is not yet strong enough. I have no doubt that the will…[for]
4 This belief was not limited to FOMC members. In reflections on 1978-79, Ted
unwinding the inflation will be forged someday.”1 In December, reflecting
Truman, at the time director of the Division of International Finance at the Federal
on a year in which inflation had again been half higher than anticipated,
Reserve Board, recalls Lyle Gramley, a member of the Council of Economic
Burns noted with approval that “the political leaders of both our major
Advisers, arguing at a July 1978 OECD meeting that one more 25-basis-point
parties have finally recognized that inflation is the nation’s number one
increase in the federal funds rate target would push the economy into recession:
Truman, Edwin. “Reflections.” Federal Reserve Bank of St. Louis Review, March/
problem” and that “even the moves of the Federal Reserve to bring down
April 2005, 87(2, Part 2), pp. 353-57.
the rate of growth of the money supply, which not long ago
caused consternation in some government circles, are now
being accepted with grace and even gentle approbation.”2
Federal Funds Rate and Taylor Rule Inflation Targets
Recently released FOMC transcripts for 1978 show that
three topics dominated each meeting: actions to defend the
falling foreign exchange value of the dollar, the increasing
Target Inflation Rates: 5% 6% 7% 8% 9%
rate of inflation, and the risk of recession. At the year’s first
meeting, Chairman Burns and Vice Chairman Volcker agreed
that domestic monetary policy was the key to the exchange
rate deterioration. Commenting on attempts to support the
Federal Funds Rate
Inflation (CPI)
dollar, Burns noted that “our intervention [in foreign exchange
markets] has demonstrated the futility of the exercise.” But
Burns was reluctant to tighten domestic monetary policy by
increasing interest rates. Throughout his career, Burns argued
that current economic conditions were driven largely by the
public’s expectations of the future pace of activity.3 Sharp
interest rate increases risked derailing the modest expansion
of 1976-77, during which business investment already had
G.W. Miller
P. Volcker
A. Burns
been weak. Hesitancy continued after G. William Miller
(Mar 78 to Aug 79)
(Aug 79 to Aug 87)
(Feb 70 to Jan 78)
became Chairman in late March. Most FOMC members
appeared to believe inflation could be slowed only with
NOTE: GNP, potential GNP, and CPI data used to calculate inflation targets with the formula on p. 19 of this
policies that also slowed economic growth and thereby
publication: real-time GNP data from ALFRED (; quarterly potential GNP data from
Clark, Peter K. “Potential GNP in the United States, 1948-80.” Review of Income and Wealth, June 1979, 25(3),
increased the risk of recession.4 Notable exceptions were
pp. 141-65; CPI data from the Bureau of Labor Statistics.
Reserve Bank presidents Roos of St. Louis and Willes of


Views expressed do not necessarily reflect official positions of the Federal Reserve System.