Independent Banker - September 2023 - 34
PORTFOLIO PORTFOLIO MANAGEMENT
today, let's see what was causing
community bankers some heartburn
in 1973.
Crude references
Monetary policy
for the WIN
The Fed was battling inflation 50 years ago, too.
By Jim Reber, ICBA Securities
t may be hackneyed to say that
history repeats itself, but that
doesn't mean it's untrue. Look no
further than business and interest rate
cycles. We've all seen charts and tables
lately that display the confluence of
short- and long-term interest rates, the
relationships between fed funds and
unemployment, and correlations of
mortgage costs and housing prices.
As it turns out, exactly one-half
century ago, many of the same forces
I
present today in our domestic and
global economies were at play. It
caused the Federal Reserve to take
aggressive and even unprecedented
action that would have consequences
in the near and intermediate term.
There was also a campaign from
the White House to drum up public
support that, in retrospect, was
almost comical. Since we're at the
50th anniversary of these events,
and there seem to be a few parallels
The roots of the economic distress
visited upon the American people
back then was an oil embargo
orchestrated by a cartel of Middle
East oil-producing countries known
as the Organization of Arab Petroleum
Exporting Countries (OAPEC). This
was in retaliation for what the cartel
deemed was the Western democracies'
support of Israel in the Yom Kippur
War in October 1973.
However, the U.S. economy was
already on shaky ground prior to
the embargo. High levels of deficit
spending (by 1970s standards) to
help finance the Vietnam War had
pushed inflation into the 6% range
early in the decade. In response, the
Federal Reserve board, chaired by
Arthur Burns, began raising fed funds
aggressively. From a starting point of
5.5%, the benchmark overnight rate
reached 10% by the end of the year,
which was the first time we had ever
seen double-digit fed funds.
Meanwhile, the stock market was
tanking (S&P 500 Index was down
17% in 1973 and another 30% in '74),
partly in response to the oil embargo
that went into effect in October.
This caused the price of crude oil to
skyrocket. With that came increases
in overall inflation and concerted
efforts by the Fed and the Ford
administration (which took office in
August 1974 upon the resignation
of Richard Nixon) to get prices
under control.
Although the embargo only
lasted for six months, the price of a
barrel of crude oil quadrupled, and
annual inflation rates hit over 11%
by December 1974. Gross domestic
product (GDP), as we've been
reminded, is reported in " real " terms
34 // ICBA Independent Banker // September 2023
Composite photo by Elroce (television), Aaron Kohr (Federal Reserve)/Adobe
Independent Banker - September 2023
Table of Contents for the Digital Edition of Independent Banker - September 2023
Contents
Independent Banker - September 2023 - Cover1
Independent Banker - September 2023 - Cover2
Independent Banker - September 2023 - Contents
Independent Banker - September 2023 - 2
Independent Banker - September 2023 - 3
Independent Banker - September 2023 - 4
Independent Banker - September 2023 - 5
Independent Banker - September 2023 - 6
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