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When Tight Is Too Tight: The Federal Reserve’s Response to the Post-World War II Spike in Inflation

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Abstract

With the end of World War II, the massive expansion of defense spending came to a halt, and the money supply financing it quickly stabilized. However, the real money supply declined further with the transitory inflationary upswing of 1946–47, which fueled deflationary expectations, passively pushing up real interest rates and triggering the 1949 recession. We compare the Fed’s current stance to this historical episode, concluding that the ongoing tightening is already sufficient to normalize monetary conditions to prepandemic trends. This article also discusses how fiscal policy might affect "neutral" interest rates in this context.

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  • Nicholas Croteau & Federico S. Mandelman, 2023. "When Tight Is Too Tight: The Federal Reserve’s Response to the Post-World War II Spike in Inflation," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2023(8), pages 1-9, November.
    • Handle: RePEc:fip:a00068:97640
    DOI: 10.29338/ph2023-8
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    Keywords

    Money aggregates; inflation; World War II; neutral interest rates; fiscal policy;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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