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The credibility I'm referring to is: when Jerome Powell says "we have the tools at our disposal to control inflation, and if it persists, we will not hesitate t
by jbay808 5y ago
The credibility I'm referring to is: when Jerome Powell says "we have the tools at our disposal to control inflation, and if it persists, we will not hesitate to use them", how much do you update your expectations of future inflation and interest rates?
If statements like that start to sound like a bluff and no longer cause you to update your expectations away from high inflation and low interest rates, then the Fed has lost a certain amount of credibility. And that credibility should be thought of in some sense a conserved value. It's not regained instantly, but rather only by the market being surprised to discover that the Fed wasn't bluffing. And that's an expensive surprise, because by definition, it goes beyond what the market priced in.
- cma 5y agoThey have a dual mandate on both employment and inflation, and have to balance.
- jbay808 5y agoFor sure, and I strongly believe that a dual mandate was a grave mistake because a single-output controller simply can't control two variables that respond in opposite directions to that output. This allows their policymaking to be politically influenced and pick winners, and is one strong reason their inflation-fighting credibility is low.