A Comparison of Fed "Tightening" Episodes since the 1980s

This article examines how the real economy and inflation and inflation expectations evolved in response to the six tightening episodes enacted by the FOMC from 1983 to 2018. The findings indicate that the sixth episode (2015–18) differed in several key dimensions compared with the previous five episodes. In the first five episodes, the data show the FOMC was generally tightening into a strengthening economy with building price pressures. In contrast, in the final episode the FOMC began its tightening regime during a deceleration in economic activity and with headline and core inflation remaining well below the FOMC’s 2 percent inflation target. Moreover, both short- and long-term inflation expectations were drifting lower. These developments helped explain why there was a one-year gap between the first and second increases in the federal funds target rate in the final episode. Another key difference is that in three of the first five episodes, the FOMC continued to tighten after the yield curve inverted; a recession then followed shortly thereafter. However, in the final episode, the FOMC ended its tightening policy about eight months before the yield curve inverted.