The high inflation of the 1970s
In the 1970s, the Fed tried a "stimulation-accommodation" approach to tame inflation and an economic downturn, which meant increasing open-market purchases to stimulate the economy, and then accommodated the recovery by keeping interest rates down, according to the Library of Economics and Liberty. The approach pushed inflation to a high of about 14 percent, according to official numbers, though Edmunds says actual inflation was a few percentage points higher.
The stock market, unemployment rate and deficit weren't doing too well, either, he added. The Federal Reserve had a dual mandate to mind: Keep inflation steady and unemployment low.
But those goals could contradict each other, Wellington says.
Ultimately, when inflation started receding, unemployment rose. It eventually reached nearly 10 percent in the late '70s, according to the Bureau of Labor Statistics.
It took a new Fed chairman, Paul Volcker -- nicknamed "Darth Volcker" during this period -- to reroute the economy. He tightened monetary policy, made the Fed more independent from government and took a lightsaber to inflation. It fell from about 13 percent in 1979 to less than 3 percent in 1983, according to the U.S. inflation calculator.
"Sometimes you have a restrictive monetary policy and you end up increasing unemployment," Wellington says. "Now, oops, all of a sudden you're not doing what your mandate says."