Most expect the official review into the Fed's monetary policy will lead to no formal change
was a little surprised when she was asked to speak at an event held by the Dallas Federal Reserve. What could a woman who runs a food bank have to say about monetary policy? On February 25th she found herself describing to Richard Clarida, vice-chairman of the Federal Reserve, the problems her customers face, including “how do you cut open a butternut squash if you don’t have a sharp knife?”
One could ask why the review is happening now; economists have argued over the Fed’s framework for years. The first official answer is that economic conditions are ripe for some chin-stroking, with unemployment at its lowest level in decades and inflation close to target. Now is as good a time as any for the Fed to take stock.
The fear is that this downward drift blunts central bankers’ tools. If inflation hits the target in good times, but undershoots it in bad, inflation expectations could drift downwards. Since these expectations then influence wage and pricing decisions, they would in turn have an impact on actual inflation, making it harder to achieve the inflation target.
It might not work, of course, if no one believed that the Fed would be able to resist tightening policy when the economy did get going. It could also backfire. What if, in the process of temporary overshooting, inflation expectations began drifting above the target? On February 26th Pat Toomey, an American senator, sternly reminded Jerome Powell, the Fed’s chairman, that a period of overshooting would be a period without price stability.
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