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>> This loss of trust is a major problem. For example, if you no longer believe the Fed inflation target, then you will base your actions on what you think the

>> This loss of trust is a major problem. For example, if you no longer believe the Fed inflation target, then you will base your actions on what you think the inflation rate will be, which can lead to cycles of inflation. If you believe inflation will be high soon, you will buy a lot of stuff now when prices are lower. However, other people will realize this too, and then there will be a race to buy goods and services, which will lead to less supply and higher prices. This creates more demand, which leads to higher prices, creating the inflationary doom loop. Showing that losing the Fed’s credibility may not be worth the benefit of a better target. The FED is clearly in a damned if they do damned if they dont scenario. Blaming the target feels like a red herring. In the scenario they pitched would create demand and supply shocks in the short term but recession must and would is surely to follow because of the inefficiencies in the market. The real question is Who is in charge here? If the Fed was, they would and could get in front of inflation and raise rates to where inflation would not come back however, at the risk of upsetting markets, it seems they've been politicized into inaction.

bobthepanda 3y ago
the inflation rate setting is trying to predict human behavior and so it is always a damned if you do damned if you don't. that being said, the psychological power of central banks is very real. Brazil's real was introduced in 1994, after an intermediate period in which the prices had to be dual listed in the old and future currency, but the future currency had not been printed yet. They just never inflated the future currency, and people seemed to believe that. https://en.wikipedia.org/wiki/Plano_Real https://en.wikipedia.org/wiki/Plano_Real
ajross 3y ago
You understand that the paragraph you quoted was a didactic illustration[1], not a description of reality, right? In fact inflation is sitting right at 3% right now, not at the 2% target but hardly very far off. > The real question is Who is in charge here? If the Fed was, they would and could get in front of inflation and raise rates They... did? [1] Specifically of the situation where a change of target rate (which, again, is not happening) would be interpreted by the market as a loss of control.
- Tyrek 3y ago
  Trailing 12 Mths Inflation: 3.2% (Headline) 3.8% (Core). In both cases, it's at least 50% above target. While a smaller gap than in recent years, it's still fairly sizable, all things considered.
  - ajross 3y ago
    Oh, come on. CPI inflation since 1960: https://fred.stlouisfed.org/graph/?g=rocU https://fred.stlouisfed.org/graph/?g=rocU Nothing about the current conditions are particularly abnormal. CPI was at 2.5-3 through the entirety of the dot com boom, higher than that still in the 80's, and of course between 1968 and 1982 it was almost entirely above 5%. I really don't think you're considering all the things, all things considered.
- georgeplusplus 3y ago
  As someone else pointed out at 3% , it's at least 50% above the target I don't see how someone can consider that small. Cherry picking historical data as a way to hand wave that fact is disengenious at best. Even if for some reason you think 3% is not high, inflation is clearly starting to reverse which the fed has admitted its not gonna get better in the short term. Contrast this to Volker who made the hard decision to raise rates well above inflation not once but twice.
  - ajross 3y ago
    What number do you consider "not small", and do to promise to reconsider your priors when it's reached? The doom slinging on this issue really is getting ridiculous. People picked their rhetoric based on an assumption of 8-9% a year ago (for baldly partisan reasons) and are refusing to reconsider when it turned out the doom didn't arrive.
    - georgeplusplus 3y ago
      Its not doom slinging. They have a target and even with all the raises they have done they cannot hit that target as banks are clearly under stress or they would raise more. This should come across as odd to you. The historical norm has been the 2% benchmark and the onus should be on the fed to get there.

bobthepanda 3y ago

the inflation rate setting is trying to predict human behavior and so it is always a damned if you do damned if you don't. that being said, the psychological power of central banks is very real. Brazil's real was introduced in 1994, after an intermediate period in which the prices had to be dual listed in the old and future currency, but the future currency had not been printed yet. They just never inflated the future currency, and people seemed to believe that. https://en.wikipedia.org/wiki/Plano_Real https://en.wikipedia.org/wiki/Plano_Real

ajross 3y ago

You understand that the paragraph you quoted was a didactic illustration[1], not a description of reality, right? In fact inflation is sitting right at 3% right now, not at the 2% target but hardly very far off. > The real question is Who is in charge here? If the Fed was, they would and could get in front of inflation and raise rates They... did? [1] Specifically of the situation where a change of target rate (which, again, is not happening) would be interpreted by the market as a loss of control.

Tyrek 3y ago
Trailing 12 Mths Inflation: 3.2% (Headline) 3.8% (Core). In both cases, it's at least 50% above target. While a smaller gap than in recent years, it's still fairly sizable, all things considered.
- ajross 3y ago
  Oh, come on. CPI inflation since 1960: https://fred.stlouisfed.org/graph/?g=rocU https://fred.stlouisfed.org/graph/?g=rocU Nothing about the current conditions are particularly abnormal. CPI was at 2.5-3 through the entirety of the dot com boom, higher than that still in the 80's, and of course between 1968 and 1982 it was almost entirely above 5%. I really don't think you're considering all the things, all things considered.
georgeplusplus 3y ago
As someone else pointed out at 3% , it's at least 50% above the target I don't see how someone can consider that small. Cherry picking historical data as a way to hand wave that fact is disengenious at best. Even if for some reason you think 3% is not high, inflation is clearly starting to reverse which the fed has admitted its not gonna get better in the short term. Contrast this to Volker who made the hard decision to raise rates well above inflation not once but twice.
- ajross 3y ago
  What number do you consider "not small", and do to promise to reconsider your priors when it's reached? The doom slinging on this issue really is getting ridiculous. People picked their rhetoric based on an assumption of 8-9% a year ago (for baldly partisan reasons) and are refusing to reconsider when it turned out the doom didn't arrive.
  - georgeplusplus 3y ago
    Its not doom slinging. They have a target and even with all the raises they have done they cannot hit that target as banks are clearly under stress or they would raise more. This should come across as odd to you. The historical norm has been the 2% benchmark and the onus should be on the fed to get there.