What Does the Federal Reserve Think That It Is Doing?
Gavyn Davies is greatly puzzled:
Has the Fed’s reaction function changed?: Inflation is currently a little above the official 2 percent target, but the FOMC says that it will soon drop below target and remain there consistently over the next two years. Meanwhile unemployment is predicted by the FOMC to remain higher than the structural or “natural” rate for several years into the future. With inflation expected to be lower than target and unemployment higher than target over the entire horizon relevant for policy, it is surprising that FOMC has been unwilling to signal any inclination towards further easing….
For someone who has previously argued that he takes the Fed’s dual mandate seriously, and has also believed that unemployment in the current recession is demand determined, not supply determined, it is odd to hear the chairman giving so little weight to the fact that the Fed’s employment objective will not be achieved for several years…. Although the chairman says that it is a symmetrical target around 2 percent, the committee in fact seems to have little or no tolerance for taking any risk that inflation might exceed 2 percent for even a fairly short space of time. This is also more hawkish than would seem consistent with the dual mandate…. [T]he FOMC seems have veered in the direction of interpreting its target rather like the ECB, where 2 percent inflation is regarded as a ceiling, not an average, and where unemployment formally has no role in monetary policy…