@kcblitzkrieg
The case for not interfering at all is simple: the signs were there that things were easing up and had peaked.
Just because something worsens and eventually recovers does not mean what was done was needed to make it recover. Again, just as with FDR and the depression, the case can be made he unnecessarily worsened and lengthened a bad situation that was recovering.
The whole ‘economic theory’ of raising rates to lower inflation ‘forces’ a recession has also been revisited in the last few years with the healthy economy.
So, is it true that inflation goes up, interest rates get raised, the economy slows, inflation comes down, and then a recession follows? Therefore, if the economy continues to boom, you say it was the interest rates; but if a recession happens, you can also say it was the interest rates.
Whether it is a chain reaction or is it ‘psychological’ messaging to the folks and, hence, the markets.
So, it is not very easy to pin inflation down. When one side says FDR made the recovery quicker or Volcker’s increases lowered inflation quicker, the other side easily can make a very good case that the exact opposite is true.
Sometimes this is due to hindsight, of course.
You can, on the other side, say he should have done nothing.
The FED’s contention is always that they cannot affect the supply side as much as the demand side on inflation. This simply is not true. They control the supply of credit, and that, for sure, affects the supply side of the economy.
So the policy does not also make sound economical sense. If the cost of capital is raised, you essentially are increasing prices because you are restraining production.
You can look at a chart during these times of CPI and see this. It was coming down already. Then it exploded.
So, as one guy some years ago wrote in part, “Volcker’s policies created the inflation he claimed to have destroyed. And yet, he is heralded as this hero in Wall Street folklore.”
Like he asked, “But was Volcker in fact an arsonist masquerading as a firefighter?”
Basically three choices: 1) Do what he did (up and down and back up) to get two recessions (one that was very bad); 2) stick with his original plan and not relent; 3) not fool with it at that time because the signs were there that it had peaked and was poised to ease off.
I come down on the side of number 3.
Longer answer than you wanted, I know. But it could have and should have been even longer and more detailed.
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