If it doesn’t want to push the economy into recession, the central bank will probably have to abandon its 2% inflation target.
Someone is in denial over inflation — either investors or Federal Reserve policymakers. But no matter how things play out, the disconnect suggests the Fed has lost its credibility. Or perhaps it never had it to begin with. And if that’s the case, soft landing or hard, one casualty of this economy could be the Fed’s inflation-targeting regime.
It’s not easy for me to say that. I was raised on inflation targeting. It was my monetary policy religion. Most economists of my vintage were dutifully taught that after generations of ineffective or damaging monetary policy tools, we had finally figured it out. Credible communication was among the Fed’s most powerful tools. And if the Fed committed to an inflation target, it would become self-fulfilling, as markets would price in the target and wage contracts would be set accordingly. And that would give policymakers discipline to keep inflation stable and predictable. After all those years of mistakes, we thought we’d cracked the code.
Continue reading the entire piece here at Bloomberg Opinion (paywall)
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
Photo by Aslan Alphan/iStock