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The Fed has pushed interest rates high because it doesn't want to repeat the 1970s

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Inflation is uncomfortably high, and the longer that continues, the harder it may be to get prices under control. That's why the Federal Reserve is pouring cold water on the U.S. economy in hopes of dousing inflation before it turns into a smoldering dumpster fire. It's a lesson borne of painful experience in the 1970s, when prices were allowed to climb unchecked for a decade. NPR's Scott Horsley reports.

SCOTT HORSLEY, BYLINE: Just two months after taking office in 1974 and one month after pardoning Richard Nixon, Gerald Ford stepped before a joint session of Congress to address what he called public enemy No. 1.

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GERALD FORD: We must whip inflation right now.

HORSLEY: In the mid-'70s, you could actually get a campaign-style button with that slogan to replace the yellow smiley-face button on your wide lapels.

ALAN BLINDER: Oh, I still have my WIN button. It said, W-I-N, whip inflation now - red button with white letters.

HORSLEY: But Princeton economist Alan Blinder says it was the country that got whipped in the '70s as inflation soared into double digits. Supply shocks were part of the problem. The Arab oil embargo and the Iranian Revolution brought an end to the days of cheap gasoline.

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UNIDENTIFIED REPORTER: Today's OPEC increases are expected to drive the price of unleaded up to a national average of $0.77 per gallon.

HORSLEY: Assorted farm calamities also drove up grocery prices. On "All In The Family," inflation was a not-so-funny punchline.

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JEAN STAPLETON: (As Edith Bunker) Tonight, we're having spaghetti with marinara sauce.

(LAUGHTER)

CARROLL O'CONNOR: (As Archie Bunker) Marinara sauce is nothing but lumpy juice.

(LAUGHTER)

STAPLETON: (As Edith Bunker) But, Archie, meat is so expensive.

HORSLEY: Prices actually started creeping up in the mid-'60s when the federal government was spending heavily on both the Vietnam War and the Great Society. Nixon froze prices in the early '70s, but that just postponed the pain. Once controls were lifted, prices bounced even higher. By 1978, Jimmy Carter was calling inflation America's most pressing domestic problem.

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JIMMY CARTER: Fighting inflation will be a central preoccupation of mine during the months ahead. And I want to arouse our nation to join me in this effort.

HORSLEY: Despite the tough talk from Nixon, Ford and Carter, prices kept climbing. Economist Blinder, who later served as vice chairman of the Federal Reserve, says psychology was partly to blame. In the '70s, Americans came to believe that high inflation was here to stay, and that expectation became a kind of self-fulfilling prophecy.

BLINDER: If you're a business and you expect the inflation rate to be 5%, you're likely, when it comes time to set the prices for the next year, go up 5%. On the other hand, if you think inflation is going to be 1%, you're more likely to go up 1%.

HORSLEY: Ultimately, it took a crackdown by cigar-chomping Fed Chairman Paul Volcker to break that cycle. Volcker slammed the brakes on the economy by raising interest rates to 20%. He told the MacNeil/Lehrer NewsHour tough medicine was necessary to prove he was serious about getting inflation under control.

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PAUL VOLCKER: At some point this dam is going to break, and the psychology is going to change.

HORSLEY: It was a painful correction with nearly 4 million jobs lost, but it worked. By 1983, inflation had retreated to just over 3%, and it stayed low for the next four decades until the pandemic hit, followed by the war in Ukraine. At first, Fed officials thought this new bout of high inflation was a temporary phenomenon and that prices would soon settle down on their own. That theory has now been scrapped, buried under a pile of ever-increasing price tags. Since the spring, the Fed's been aggressively raising interest rates in an effort to tamp down demand and curb inflation. Some worry that will lead to slower economic growth and higher unemployment. But Fed Chairman Jerome Powell says failing to control prices would be worse.

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JEROME POWELL: The record shows that if you postpone that, that delay is only likely to lead to more pain.

HORSLEY: One thing working in the Fed's favor is that unlike the 1970s, high inflation has not yet gotten baked in to people's long-term thinking about the economy. Surveys show most people still believe prices will level off in the coming years. Al and his colleagues want to make sure of that before an extended period of high inflation starts to change people's minds. Scott Horsley, NPR News, Washington.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.