Watching today’s press conference with Fed chief Jerome Powell reminded me of something Milton Friedman said in 1978:

“Nearly a dozen years ago, I warned of an inflationary recession (Newsweek, Oct. 17, 1966). We have since then had three inflationary recessions and a fourth is almost surely on the way. During the first, the brief mini-recession of 1967, consumer prices rose 2.4 per cent per year; during the longer and more severe recession from December 1969 to November 1970, prices rose 5.3 per cent per year; during the still longer and even more severe recession from November 1973 to March 1975, prices rose 10.8 per cent per year; during the coming recession, prices are likely to rise at least 7 per cent per year.

Each scenario has been the same: rapid growth in the quantity of money followed by economic expansion and then, much later, by rising inflation; a public outcry against inflation, leading the authorities to reduce monetary growth sharply; some months later, an inflationary recession; a public outcry against unemployment, leading authorities to increase monetary growth sharply; some months later, the beginning of expansion, along with a decline in inflation. Back to the starting point.”

Friedman also had the answer:

“What is the right policy now? That is easy to say, hard to do. We need a long-term program dedicated to eliminating inflation. The Fed should announce that it proposes to increase M2 at the annual rate of, say, 8 per cent during 1978, 7 per cent during 1979, 6 per cent during 1980, 5 per cent during 1981; and 4 per cent during 1982 and all subsequent years. To relieve the fiscal pressures on the Fed, such a monetary policy should be accompanied by a budget policy of reducing Federal spending as a fraction of national income—also gradually but steadily.

Such a monetary and fiscal program would eliminate inflation by 1983—for good. Such a gradual program would avoid economic disruption.”

Today I would formulate it slightly differently as:

“The Fed should announce that it over the coming 2 years gradually will reduce the growth rate on nominal spending to an annual rate of 4% and keep it growing at that rate – year-in-and-year-out thereafter.”

And yes, US fiscal policy makers obviously should support such policy by balancing the US government budget by immediately bringing growth of nominal (non-cyclical) government spending down well-below 4%.