Recent statements by Federal Reserve officials would lead just about anyone to believe that one of the bank's central missions has always been to guard against the lurking threat of deflation. They warn that since official inflation has remained below the Fed's 2 percent target for almost two years, the country is liable to fall into a stagnant morass unless the Fed acts boldly to hit its target. It may surprise many that this view is strictly a 21st-century development. The fear (some would say paranoia) regarding sub-2 percent inflation was nowhere in evidence in the past, even when inflation was lower than it is today.

The average headline inflation index (which includes food and energy) in the United States has increased about 1.5 percent since 2013 (this is tabulated based on the many changes in the Consumer Price Index over the past 20 years that have tended to produce lower inflation statistics). In the 70 years since the end of World War II, there was only one similar period, the seven-year stretch from 1959 to 1965 when headline inflation averaged a skimpy 1.26 percent. Contemporary economists would surely assume that during that time the Fed would have broken out the big guns to push inflation back up over 2 percent. In fact, the opposite was true.

In 1961, when inflation came in at just 1.07 percent, Fed Chairman William McChesney Martin (who was hardly considered hawkish at the time) began a campaign of consistent rate hikes that lasted five full years, from an average of 1.96 percent in 1961 to 5.1 percent for all of 1966. He continued the hikes even though inflation didn't move above 1.5 percent, and unemployment didn't fall below 5 percent, until 1965. The biggest increase in the cycle came in 1962 when the Fed jacked rates by 75 basis points (during a year when inflation was below 1.2 percent). Incredibly, Martin and the Fed did this at a time when unemployment (which averaged 6.15 percent in 1961 and 1962) was 36 percent higher than it had been during the prior 10 years (averaging 4.5 percent from 1951 to 1960). To use a 21st-century response, modern economists would say, “What's up with that?”