Why the 1970s Stagflation Isn’t Coming Back: The Fed Has Learned Its Lesson

by | Aug 4, 2025 | The Doctor's Dose

Stagflation Isn’t Coming Back

The term “stagflation” has resurfaced in economic headlines, drawing comparisons to the 1970s—an era of surging prices, weak growth, and high unemployment. But while stagflation fears in 2025 are understandable amid rising tariffs and a cooling labor market, today’s economic environment is fundamentally different.

In fact, as Matthew Jeffrey Vegari of Clearwater Analytics argues, those expecting a rerun of the 1970s are likely misreading both the present economic conditions and the Federal Reserve’s playbook.

Stagflation fears in 2025

📉 What Is Stagflation—And Why It’s Not Here (Yet)

Stagflation refers to a toxic mix of:

  • High inflation

  • Low or no economic growth

  • High unemployment

Currently, only two of those three conditions are at risk of appearing. Inflation shows signs of re-accelerating, partly due to tariff pressures, and GDP growth may slow in the coming quarters. But the U.S. labor market remains relatively resilient, with unemployment still hovering near historical lows.

Without a sustained rise in unemployment, the third—and arguably most important—pillar of stagflation is missing. That makes comparisons to the 1970s premature.

🕰️ The 1970s: A Policy Failure, Not Just a Price Shock

The true lesson of the 1970s lies not just in the economic pain but in the policy failures that allowed inflation to spiral. A combination of:

  • Oil shocks (OPEC embargo)

  • Loose fiscal policy (Vietnam War, Great Society)

  • Weak and politically influenced monetary policy

…allowed inflation to run above 5% for nearly a decade, peaking at nearly 15% in 1980. The Fed, fearful of the recessionary impact of tightening, waited too long.

Ultimately, it took Paul Volcker’s drastic rate hikes and a brutal double-dip recession to restore credibility and crush inflation expectations.

🛠️ Today’s Fed Is Better Equipped—and More Resolved

Unlike in the 1970s, today’s Federal Reserve is independent, transparent, and prepared. Fed Chair Jerome Powell and his colleagues have shown a willingness to prioritize inflation stability, even if that means holding rates higher for longer—even as the labor market cools.

Critically:

  • Inflation expectations remain anchored among consumers and businesses.

  • Markets don’t expect runaway inflation—they expect moderation.

  • Policymakers have the credibility Volcker had to earn the hard way.

If inflation and unemployment rise in tandem, the Fed is unlikely to panic into cutting rates too soon. Instead, they’ll defend their mandate to keep inflation in check, knowing that stable prices are the prerequisite for sustainable employment.

🔄 The Self-Fulfilling Risk: Unanchored Expectations

One of the Fed’s most valuable victories over the past 40 years has been keeping inflation expectations stable. When workers and firms believe inflation will rise indefinitely, they act preemptively—raising wages and prices—and create a self-reinforcing inflation cycle.

The danger isn’t elevated prices alone—it’s the erosion of confidence in policy. That’s what made the 1970s so damaging.

Today, expectations are not yet unmoored. And that gives policymakers room to operate carefully, not reactively.

🔮 What If Unemployment Rises?

A mild uptick in unemployment alongside persistent inflation would indeed present a challenge. But even in that scenario:

  • The Fed is unlikely to abandon its inflation fight.

  • Deep rate cuts won’t arrive swiftly, especially with tariff-related inflationary pressures building.

  • Policymakers will balance their dual mandate, but not at the expense of long-term stability.

As Vegari notes, true stagflation requires both policy missteps and structural shocks—neither of which appear imminent in today’s environment.

✅ Bottom Line: This Isn’t the ’70s

Stagflation fears in 2025 may dominate headlines, but history is not destined to repeat itself. Yes, inflation may remain sticky, and yes, growth could slow. But:

  • The Fed has the tools—and the will—to respond effectively.

  • The labor market remains strong enough to support growth.

  • Inflation expectations remain grounded, limiting the risk of a runaway spiral.

The real threat isn’t a repeat of the 1970s. It’s policymakers losing their nerve. For now, the Fed’s focus remains squarely on avoiding that mistake—and that should give investors, businesses, and households reason to be cautiously optimistic.