3 ms·

well, treating 2% like a ceiling led them to consistently underperform 2%. It wasn't 2% on average, it was below that.

wahern 6y ago
Maybe they should go back to prior practice where the Fed never set a formal target. From 2012: > The Federal Reserve took the historic step on Wednesday of setting an inflation target, a victory for Chairman Ben Bernanke that brings the Fed in line with many of the world’s other major central banks. Source: https://www.reuters.com/article/us-usa-fed-inflation-target-idUSTRE80O25C20120125 https://www.reuters.com/article/us-usa-fed-inflation-target-... Has Bernanke issued a mea culpa, yet?
- scoopertrooper 6y ago
  For what though?
  - wahern 6y ago
    I can't find any good references to the debate concerning explicit vs implicit inflation targeting, as opposed to inflation targeting more generally. But here's what Greenspan had to say 2005: > To date, we have chosen not to formulate explicit inflation targets, in part, out of concern that they could inhibit the effective pursuit of our goal. https://www.federalreserve.gov/boarddocs/speeches/2005/200508272/default.htm https://www.federalreserve.gov/boarddocs/speeches/2005/20050... And in 2001: > A specific numerical inflation target would represent an unhelpful and false precision https://www.nytimes.com/2001/10/12/business/greenspan-rejects-idea-of-inflation-targets.html https://www.nytimes.com/2001/10/12/business/greenspan-reject... One of the arguments against inflation targeting, whether implicit or explicit, is that it invites asset bubbles--financial markets know that so long as the CPI[1] doesn't budge, they can go wild. But that's a somewhat different debate. I think the basic argument against explicit targeting is that it hinders the Feds flexibility. With implicit targeting there's a degree of uncertainty and so markets arguably respond better to abrupt or unexpected changes; whereas with explicit targeting the Fed has to be more careful and gentle because markets will more heavily leverage against that fixed number. [1] Or whatever measure they use; I don't know if it's CPI specifically.
    - scoopertrooper 6y ago
      As a general point I wouldn't quote Greenspan on just about anything after the GFC > One of the arguments against inflation targeting, whether implicit or explicit, is that it invites asset bubbles--financial markets know that so long as the CPI[1] doesn't budge, they can go wild. But that's a somewhat different debate. Basel III introduced a 'discretionary counter-cyclical buffer' on capital requirements to enable central banks to better manage asset bubbles, while still focusing on price stability with the cash rate. > I think the basic argument against explicit targeting is that it hinders the Feds flexibility. With implicit targeting there's a degree of uncertainty and so markets arguably respond better to abrupt or unexpected changes; whereas with explicit targeting the Fed has to be more careful and gentle because markets will more heavily leverage against that fixed number. Central banks strive to keep inflation at the target band on average, over the long term. It doesn't stop them from taking quick and decisive action in a crisis. A cursory study of the bank's actions (under Bernanke) at the outset of the GFC will affirm this. https://en.wikipedia.org/wiki/Basel_III#Capital_requirements https://en.wikipedia.org/wiki/Basel_III#Capital_requirements
TMWNN 6y ago
That "underperformance" is part of why the Fed feels comfortable with this approach. There is room for the Fed to now accept >2% inflation, because it is saying that the average over a period of years/decades will be 2%.

Maybe they should go back to prior practice where the Fed never set a formal target. From 2012: > The Federal Reserve took the historic step on Wednesday of setting an inflation target, a victory for Chairman Ben Bernanke that brings the Fed in line with many of the world’s other major central banks. Source: https://www.reuters.com/article/us-usa-fed-inflation-target-idUSTRE80O25C20120125 https://www.reuters.com/article/us-usa-fed-inflation-target-... Has Bernanke issued a mea culpa, yet?

scoopertrooper 6y ago
For what though?
- wahern 6y ago
  I can't find any good references to the debate concerning explicit vs implicit inflation targeting, as opposed to inflation targeting more generally. But here's what Greenspan had to say 2005: > To date, we have chosen not to formulate explicit inflation targets, in part, out of concern that they could inhibit the effective pursuit of our goal. https://www.federalreserve.gov/boarddocs/speeches/2005/200508272/default.htm https://www.federalreserve.gov/boarddocs/speeches/2005/20050... And in 2001: > A specific numerical inflation target would represent an unhelpful and false precision https://www.nytimes.com/2001/10/12/business/greenspan-rejects-idea-of-inflation-targets.html https://www.nytimes.com/2001/10/12/business/greenspan-reject... One of the arguments against inflation targeting, whether implicit or explicit, is that it invites asset bubbles--financial markets know that so long as the CPI[1] doesn't budge, they can go wild. But that's a somewhat different debate. I think the basic argument against explicit targeting is that it hinders the Feds flexibility. With implicit targeting there's a degree of uncertainty and so markets arguably respond better to abrupt or unexpected changes; whereas with explicit targeting the Fed has to be more careful and gentle because markets will more heavily leverage against that fixed number. [1] Or whatever measure they use; I don't know if it's CPI specifically.
  - scoopertrooper 6y ago
    As a general point I wouldn't quote Greenspan on just about anything after the GFC > One of the arguments against inflation targeting, whether implicit or explicit, is that it invites asset bubbles--financial markets know that so long as the CPI[1] doesn't budge, they can go wild. But that's a somewhat different debate. Basel III introduced a 'discretionary counter-cyclical buffer' on capital requirements to enable central banks to better manage asset bubbles, while still focusing on price stability with the cash rate. > I think the basic argument against explicit targeting is that it hinders the Feds flexibility. With implicit targeting there's a degree of uncertainty and so markets arguably respond better to abrupt or unexpected changes; whereas with explicit targeting the Fed has to be more careful and gentle because markets will more heavily leverage against that fixed number. Central banks strive to keep inflation at the target band on average, over the long term. It doesn't stop them from taking quick and decisive action in a crisis. A cursory study of the bank's actions (under Bernanke) at the outset of the GFC will affirm this. https://en.wikipedia.org/wiki/Basel_III#Capital_requirements https://en.wikipedia.org/wiki/Basel_III#Capital_requirements

TMWNN 6y ago

That "underperformance" is part of why the Fed feels comfortable with this approach. There is room for the Fed to now accept >2% inflation, because it is saying that the average over a period of years/decades will be 2%.