Ending Hunger in America, 2014 Hunger Report Full Report | Page 51

CHAPTER 1
The Fed’s Power to Reduce Unemployment and Poverty
In the late 1960s, U.S. economist Milton Friedman published an academic paper describing
an interlocking relationship between inflation and low unemployment. At the time, the paper
had limited influence on policymaking. The War on Poverty had been launched a few years
earlier, and low unemployment was understood to be essential to achieving rapid reductions
in poverty.
Between 1959 and 1973, the
poverty rate was cut from 22 percent to 11 percent; if the economy
had continued to grow at the same
rate, poverty was projected to be
a thing of the past by the early
1980s.17 But in the mid-1970s the
economy stalled. A global increase
in oil prices contributed to rising
inflation. Rising unemployment
combined with rising inflation
was called “stagflation”—otherwise
known as the Misery Index. Rising
inflation hurts people on fixed
incomes and people who have lent
money at fixed interest rates. It
also makes planning difficult and
can slow economic growth.
The Federal Reserve Board is
this nation’s central bank and manages U.S. “monetary policy,” by increasing or decreasing
the supply of money in the economy. In 1979, the annual inflation rate had soared to 13.3
percent, its highest rate in 33 years.18 Paul Volcker, then Chair of the Federal Reserve, suddenly and dramatically raised interest rates. Raising interest rates causes unemployment to
rise. By 1981, unemployment had soared to nearly 11 percent,
“The Federal Reserve
the highest level since the Great Depression. But inflation was
has kept interest rates
under control.
low since the end of
This episode remains fixed in the minds of senior policythe Great Recession
makers and business leaders, and Volcker came to be regarded
to try to stimulate
as a giant of American finance. Its effect on policymaking has
the economy and
been profound. The Fed has aimed to keep the inflation rate at
encourage lower
2 percent or less.19 The problem is that forcing inflation down
unemployment.”
to such low levels leads to high unemployment. Meanwhile,
many economists believe that inflation doesn’t harm economic growth unless it is significantly higher than 2 percent.20
The Full Employment and Balanced Growth Act of 1978—also known as the HumphreyHawkins Act—handed the Federal Reserve a dual mandate of promoting maximum employment and price stability, i.e., low inflation. Since Paul Volcker’s tenure as Chair, the Fed

www.bread.org/institute?

Federal Reserve

A Federal Reserve
Board meeting held
in December 2012.
The Fed is the nation’s
central bank.

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