The Forsaken Playbooks of the Federal Reserve
Ignoring History Raised the Odds of a Great Inflation-Like Event
“Although the Fed’s anti-inflation credibility gives it greater leeway to ease policy in the short run, over the longer term that credibility is like a capital asset that will depreciate if it is not maintained. The Fed must still ensure that inflation does not stray from target by too much or for too long, and that it reliably returns to target over time after being displaced by some shock.”1
—BEN BERNANKE, former chair of the Federal Reserve Board
Over the past four and a half years, Americans have endured an extended bout of high inflation. It began soon after the COVID-19 pandemic receded in the spring of 2021. Since then, prices have risen by more than twenty percent in aggregate. The Federal Reserve’s aggressive tightening campaign eventually brought inflation down to roughly three percent—but they failed to finish the job. A premature pivot toward easier monetary policy allowed inflationary pressures to reignite in 2025. As a result, inflation remains stuck well above the Fed’s two-percent target.
The tragedy of post-COVID inflation is that it was largely foreseeable. Lessons from comparable historical episodes demonstrate that the Fed could have responded more effectively. Instead, under Chair Jerome Powell’s leadership, the Fed committed two unforced errors. The first was its failure to act swiftly and aggressively when price pressures first emerged in 2021. The second was its premature pivot toward monetary policy easing in September 2024 and again in September 2025.
These missteps unnecessarily intensified and prolonged post-COVID inflation—and, in the process, eroded the Fed’s credibility. That loss of credibility may prove to be the most damaging consequence, as it leaves the FOMC more vulnerable to political pressure to cut rates prematurely yet again in the future.
This newsletter explores why both errors were avoidable. It draws upon lessons from two historical events. The first one reveals why the Fed should have acted more forcefully when inflation first appeared in 2021. The second shows why the Fed should have maintained more restrictive policy through the fall of 2024. The hope is that this newsletter demonstrates how the Fed leadership can improve monetary policy decisions by considering the lessons of history alongside analysis of recent economic data.
A Note on Monetary Policy Criticism
Criticizing monetary policymakers makes for easy sport. Too often, such critiques are unfair—surfacing only after events support retroactive claims of having predicted them. This newsletter contends that the Federal Reserve made two significant unforced errors. What strengthens this criticism, however, is that these arguments were articulated and documented before the outcomes validated them. The time-stamped papers referenced at the end of this newsletter back this assertion. They show that the Fed’s missteps and their consequences were foreseeable in real time through the lens of financial history.
Unforced Errors of the Federal Reserve
Chair Jerome Powell often characterizes post-pandemic economic conditions as “unusual,” but he rarely acknowledges the existence of important historical precedents. These omissions matter. By placing emphasis on the rarity of current circumstances rather than precedents that explain them, Powell subtly reinforces the perception that the Fed bears little responsibility for its missteps over the past five years. But this perception is misleading. Financial history offers at least two comparable events that could have guided policy in real time.2
The first comparable event was the post–World War I/Great Influenza inflation of 1919–1920, which arose from remarkably similar underlying conditions. When those same forces reemerged after the COVID pandemic subsided, they signaled that inflation was unlikely to be transitory. The second was the Great Inflation of 1965–1982, which demonstrated that the Fed must extinguish inflationary pressures swiftly and decisively before easing policy. Failure to do so risks allowing inflationary embers to reignite and credibility to erode. Unfortunately, the Fed appears to have disregarded the key lessons from both episodes.
Event #1: The Post World War I/Great Influenza Inflation of 1919-1920
“According to the reports on business conditions in this district…apparently few years opened with brighter prospects than 1920. Labor was fully employed at the highest wages probably ever known, manufacturing plants were being operated at the greatest possible limit, supplies of goods were small, prices were continually advancing, the public was buying lavishly, and it was generally reported that goods were being consumed as fast as produced…These conditions, which had been developing for some months undoubtedly fostered buying and speculation in all kinds of commodities.”3
—RICHARD L. AUSTIN, chairman and agent of the Federal Reserve
On November 11, 1918, World War I ended with Germany’s surrender to the Allied Powers. Only a few months later, the deadly second wave of the Great Influenza pandemic subsided. Despite feeling relieved after emerging from both a devastating war and a global health crisis, Americans feared that a deep depression was imminent. Many believed the abrupt end of wartime spending and impending collapse in European demand for U.S. exports would trigger a severe contraction. Early in 1919, signs of economic weakness seemed to confirm those fears—but the downturn was short-lived. A surge in consumer spending soon followed, fueling an economic boom and sending inflation soaring.45
In retrospect, this outcome was unsurprising. After years of wartime rationing, followed by pandemic-related shutdowns, Americans were eager to spend on goods that were temporarily considered luxuries.6 They also possessed ample savings, accumulated during several years of war-driven trade surpluses. Consumer demand was further amplified by cheap credit, as the Federal Reserve maintained an overly accommodative stance for too long. At the same time, supply chain disruptions emerged as industries shifted from total war back to a peacetime economy. Together, these forces drove a surge in prices in 1919. Much like post-COVID inflation, it showed no sign of abating without an aggressive monetary response.789
Monetary Response in 1920
The Fed responded to post-WWI/Great Influenza inflation belatedly but aggressively. Alarmed when inflation peaked around 20% in 1919, the Federal Reserve Bank of New York sharply raised the rediscount rate from 4.75% to 6.00% in January 1920. It then increased rates again to 7.00% in June 1920.1011 The response was effective (see figure below). Wholesale prices declined sharply, and the U.S. suffered a severe but short recession in 1920-1921. When the economy recovered, price stability was reestablished.
Sources: Federal Reserve Bank of Minneapolis; U.S. Bureau of Labor Statistics.
Monetary Response in 2021
In April 2021, as the most acute phase of the COVID-19 pandemic waned, inflationary pressures ignited. Much like the 1919–1920 episode, the sudden release of pent-up demand, combined with massive fiscal and monetary stimulus, was the primary driver. Price pressures were further amplified by global supply chain disruptions, as the world economy transitioned from total war back toward normalcy.
Despite the clear precedent from a century earlier, Chair Jerome Powell attributed post-COVID inflation largely to supply chain disruptions. Believing these would be temporary, he concluded that high inflation would prove “transitory.” The 1919–1920 experience strongly suggested otherwise. It demonstrated that when inflation is fueled by excess demand and easy money, the central bank must respond quickly and decisively to reverse it. Yet Powell held to the “transitory” narrative until late 2021. By the time the Fed began raising rates aggressively in March 2022, inflation had persisted at elevated levels far longer than necessary.12
Event #2: The Great Inflation of 1965-1982
“The simplest [lesson from the Great Inflation] is this: Inflation if it reemerges, ought to be nipped in the bud; the longer we wait, the harder it gets to reign in.”7
ROBERT J. SAMUELSON, Author of the Great Inflation
The Great Inflation of 1965–1982 stands as one of the few truly unprecedented episodes in U.S. financial history.13 Neither before nor since has the nation endured such a prolonged and pervasive period of high inflation. Postmortem analyses have revealed a series of policy errors. The most consequential was the Federal Reserve’s persistent bias toward the employment side of its dual mandate at the expense of price stability. This imbalance compelled the Fed to abandon tight monetary policy on multiple occasions before inflation was fully extinguished. Each premature easing allowed inflation to reignite at progressively higher levels. In turn, every failure eroded the Fed’s credibility with both the public and elected officials. This rendered the institution increasingly vulnerable to political pressure, which Presidents Lyndon B. Johnson and Richard Nixon subsequently applied.
The Great Inflation of 1965–1982 was a miserable era. For seventeen years, rising prices made the American dream feel increasingly out of reach. Worse still, the expected trade-off between higher inflation and lower unemployment collapsed. Instead, Americans suffered both high inflation and high unemployment simultaneously. The figure below captures these dynamics: the blue line (left axis) shows the federal funds rate, the orange line (left axis) shows the 12-month trailing inflation rate, and the gray area (right axis) depicts the rise in unemployment.
Sources: Federal Reserve Bank of St. Louis; Bureau of Labor Statistics.
By the mid-1970s, inflation expectations had become deeply entrenched in the American psyche. Many feared it constituted a new normal. They resigned themselves to unaffordable mortgages, soaring commodity prices, and meager stock returns. It was not until Federal Reserve Chair Paul Volcker summoned the resolve to impose and sustain draconian monetary tightening from October 1979 through August 1982 that the Great Inflation finally ended. The remedy was painful. The U.S. suffered a deep recession from July 1981 to November 1982, and unemployment peaked at 10.8 percent in December 1982. But the pain proved worthwhile. The end of the Great Inflation ushered in a new era of economic stability and growth.
The central lesson of the Great Inflation is clear: the Federal Reserve cannot allow elevated levels of inflation to persist for too long. When it emerges, policymakers must act swiftly and decisively to extinguish it. Such action inevitably inflicts short-term economic pain, but hesitation or half-measures only delay the reckoning and increase the ultimate cost. Each failure also chips away at the Fed’s credibility, diminishing its ability to withstand political interference. Ironically, the longer inflation endures, the stronger the political pressure becomes. Elected officials are highly sensitive to voter frustration. All else being equal, they tend to favor overstimulating the economy—risking even higher inflation—rather than facing the immediate backlash of a recession.
Abandonment of Post-COVID Monetary Tightening
In 2024, the Federal Reserve’s leadership failed to heed the lessons of the Great Inflation. On August 23, 2024, Chair Powell announced the Fed’s intention to pivot toward a more accommodative monetary policy. Less than a month later, on September 18, 2024, the Fed cut the federal funds rate by 50 basis points, followed by two additional 25-basis-point cuts on November 7 and December 18. Policymakers defended this pivot by asserting that inflation was on track to return to the two-percent target and that labor market data showed signs of softening. In their public statements, Fed officials hinted that they understood the lessons of the Great Inflation, but their actions suggested otherwise. Despite their collective memory, they repeated the same error—loosening policy before inflation was decisively subdued.14
Compounding Cost of Unforced Errors
“Domestically, we should err on the side of a too liberal monetary policy, Arthur. Inflation was awful, but it was better for politics than unemployment. We should risk some inflation.”15
—PRESIDENT RICHARD NIXON
Inflationary pressures have persisted throughout 2025. Nevertheless, the current administration has steadily intensified pressure on the Fed to ease monetary policy before inflation is decisively subdued. This behavior is neither surprising nor unprecedented. Presidents Lyndon B. Johnson and Richard Nixon employed similar tactics during the Great Inflation. The political calculus was that the short-term pain of rising unemployment was far less tolerable to voters than the gradual burden of rising prices. The above quote from a recorded conversation between President Richard Nixon and Fed Chair Arthur Burns substantiates this logic. President Johnson’s actions were even more extreme. During a meeting at his Texas ranch, Johnson allegedly pinned Fed Chair William McChesney Martin Jr. against a wall and shouted, “Martin, my boys are dying in Vietnam, and you won’t print the money I need.”16
The Fed’s premature pivot in 2024 is difficult to excuse. Unlike the inflation of 1919–1920, the causes, consequences, and lessons of the Great Inflation are well documented. Yet the institution’s analytical culture seems so focused on interpreting the meaning of recent data that it has lost the capacity for historical intuition. The irony is that one doesn’t need complex, econometric models to grasp the big picture. History clearly demonstrates that easing policy before inflation is fully extinguished substantially raises the risk that it will reignite. Many current FOMC members lived through the Great Inflation and saw firsthand the suffering required to learn this lesson — yet they repeated the same mistake again.
The Rising Risk of a Great Inflation-Like Event
Soon after the Federal Reserve began raising interest rates in March 2022, I warned that the U.S. economy would likely enter a recession before price stability was restored. Afterall, recessions followed both the 1919–1920 inflation and the 1965–1982 Great Inflation. In each instance, an overcorrection was required to extinguish inflationary pressures decisively.
The similarities between post–World War I inflation and post-COVID inflation was not merely coincidental. The inflationary drivers in 1919–1920—pandemic, pent-up consumer demand, supply chain bottlenecks—were very similar to the drivers in 2021. Further, aggressive monetary tightening was required to end it. This precedent offered a clear roadmap for how the Fed would likely respond in 2022.
At the time, I also believed the Fed would avoid repeating the mistakes of the Great Inflation. The causes and consequences of that episode were thoroughly documented, and many current policymakers had personally experienced that era. For those reasons, it seemed the odds of another Great Inflation–like episode were low. In hindsight, that may have been too optimistic.
Another pattern I’ve described in a previous paper is the Fed’s recurring tendency to overcorrect for its last mistake. After the sharp recession of 1921-1922, policymakers were reluctant to tighten again too soon and thus delayed rate hikes in the late 1920s. This error contributed to the severity of the Great Crash of 1929. The same dynamic reappeared in the 1960s and 1970s, when the Fed prioritized employment over price stability because its leaders were still haunted by the mass unemployment during the Great Depression. By that logic, the Fed was predisposed to ease too early rather than too late in 2024 to compensate for its tardiness in raising rates in 2022. I considered this historical pattern, but I believed that the lessons of the Great Inflation would be more influential. It appears I was wrong.
Today, the Fed faces a serious credibility problem. The two errors described in this newsletter have weakened confidence in the institution at a moment when the public’s tolerance for the effects of inflation is wearing thin. Meanwhile, the current administration has shown a willingness to pressure the Fed to cut rates prematurely again, testing the boundaries of monetary independence—just as Presidents Johnson and Nixon once did. There is still a chance that inflation will subside on its own and/or the FOMC will summon the courage to retighten policy if necessary. But the more likely scenario is another premature easing cycle—followed by a renewed surge of inflation.
Unlike my earlier forecast, I hope this one proves wrong. Because if it doesn’t, a replay of the Great Inflation may already be unfolding.
Disclaimer: This is a personal newsletter written by Mark J. Higgins, CFA, CFP, in his individual capacity. The views expressed herein are solely those of the author and do not necessarily reflect the views, opinions, or practices of IFA or any other organization or entity with which the author is affiliated. This content is intended for informational and educational purposes only; it does not constitute professional investment advice, an offer, solicitation, or endorsement of any specific financial strategy, product, or service. The discussion contains the author’s opinions based on publicly available information and should not be interpreted as factual or predictive of future events.
Nothing in this newsletter should be construed as a guarantee of investment results, nor should past performance discussed herein be taken as indicative of future outcomes. Investing involves risks, including the potential loss of principal, and investors should consult their financial adviser or other qualified professional before making investment decisions. Additionally, every effort has been made to ensure an accurate portrayal of market practices and conditions, but the author disclaims responsibility for errors, oversimplifications, or omissions. By publishing this newsletter, the author aims to foster dialogue and education and does not intend to disparage any individual, organization, or investment strategy. Readers are encouraged to consider differing viewpoints and conduct their own research before forming opinions or investment strategies.
Any references to future economic or monetary outcomes in this newsletter are speculative and based on historical analysis and public information. Comparisons to past events, like the Great Inflation or post–World War I inflation, are meant to provide context, not predict the future. Readers should view these discussions as hypothetical and not rely on them for financial decisions. Always consult a qualified professional for advice.
Contemporaneous Documentation of Historical Precedents
The documentation provided below substantiates several of the forecasts described in this newsletter.
Lessons from the Inflation of 1919-1920
The lessons from the inflation that followed World War I and the Great Influenza were every bit as clear as those drawn from the Great Inflation, though the arguments I presented in earlier papers were somewhat less forceful. At the time, I was still developing confidence in the practical application of financial history. I was in the early stages of writing Investing in U.S. Financial History and had not yet fully grasped how compelling these historical parallels could be. Nevertheless, those early analyses anticipated that post-COVID inflation was unlikely to be transitory. They also warned that restoring price stability would require an aggressive monetary response—and that a recession would likely precede its return.
The title of this paper is one I will always regret, but the comparisons of the post-COVID years to the post World War I/Great Influenza years revealed that the economic dynamics were likely to be similar. It admittedly did not focus on inflation as a potential problem at the time, but when it materialized in force, it strongly backed the argument that it was unlikely to be transitory given the underlying causes.
This article compares many COVID-related to comparable events throughout history. Not all forecasts were correct, but the comparison of COVID-19 inflation to the post-World War I/Great Influenza inflation was helpful in forecasting the aggressive Fed response in 2022 and 2023.
Lessons from the Great Inflation of 1965-1982
October 31, 2023 — The Siren Song of a Soft Landing
This newsletter noted that one of the Fed’s more dovish Presidents, Austan Goolsbee, seemed dangerously captivated by the prospect of a soft landing. It argues that that this would be a mistake.
August 27, 2024 — The Fed Leadership Thinks This Time is Different
This newsletter was written a few days after Chair Powell announced the impending pivot in monetary policy at the annual Jackson Hole Symposium. It argued that this was a mistake.
October 10, 2024 — The Fed’s Pivot Violated the Rule that Matters Most
This newsletter was written after the Fed’s pivot, and it once again reinforced the failure of the Fed to heed the most important lesson from the Great Inflation.
December 20, 2024 — Inflation Persisted Because the Fed Relented
This newsletter was written after inflationary pressures began reigniting, just as financial history predicted it would.
Bernanke, Ben S. 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19. New York: W. W. Norton & Company, 2022.
It is unclear why the Fed failed to incorporate these powerful lessons into policy decisions. It may be simply because of deeply engrained practice of basing monetary policy decisions inordinately on the analysis of recent economic data. The problem with this approach is that the accuracy of recent data is often unreliable, as revealed by the occurrence of frequent material revisions over time. Moreover, recent data often provides little guidance on how the economy will react to Fed decisions.
Federal Reserve Board, Seventh Annual Report of the Federal Reserve Board Covering Operations for the Year 1920 (Washington, DC: Government Printing Office, 1921), 404.
Rockoff, Hugh. “Until It’s Over, Over There: The U.S. Economy in World War I.” National Bureau of Economic Research. (June 2004), 32.
Newman, Patrick. “The Depression of 1920-1921: A Credit Induced Boom and a Market Based Recovery?” Review of Austrian Economics, Forthcoming. (December 5, 2015), 15.
Interestingly, the pandemic’s economic effects were difficult to study because wartime censorship forbade newspapers from publishing information about the Great Influenza. Nevertheless, its impact could still be inferred from sharp declines in activities such as sporting event attendance.
The term “Federal Reserve Banks” is used several times when describing monetary policy. This reflects the fact that each regional bank had flexibility to set their own discount rates, and these rates often differed.
There were several explanations, but the most significant of appears to be pressure from the U.S. Treasury, which was concerned about servicing a floating rate portion of the war debt issued over the prior two years. In addition, both Treasury and Federal Reserve leaders were concerned about the impact of higher rediscount rates on the health of the financial system, as many banks had loaded their balance sheets with Liberty and Victory Bonds. Therefore, despite growing concerns about inflation and speculation, the Federal Reserve kept monetary policy loose for too long.
Friedman, Milton and Schwartz, Anna. A Monetary History of the United States, 1867-1960. Princeton University Press: New Jersey. (1963): pps. 223-224.
Board of Governors of the Federal Reserve System. Banking & Monetary Statistics, 1914-1941. (Page 441). (November 1943): pps. 439-440.
The timing and amount of the increase in the discount rate is based on the policy of the New York Federal Reserve Bank. Unlike monetary policy today, the regional banks had flexibility to offer different discounts rates. Although most adhered to the similar policies, not all adopted the same interest rate changes.
It is plausible, if not likely, that the Fed did not ignore the lessons of the 1919-1920 inflation, but, instead, was completely unaware of it. This author has found no evidence that the 1919-1920 inflation was ever discussed.
The “unprecedented” label is based on the assumption that post-COVID inflation does not morph into a Great Inflation-like event. Only time will reveal if this assumption is valid.
Robert J. Samuelson’s Book, The Great Inflation and Its Aftermath, Allan Meltzer’s paper, The Origins of the Great Inflation, and Arthur Burn’s speech, The Anguish of Central Banking are just a few of many resources that the Fed could have referenced to gain insight into the potential consequences of a premature pivot to accommodative monetary policy.
Amity Shlaes, Great Society: A New History (New York: HarperCollins, 2019), 389.
Shlaes, Great Society, 201
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