So it was 1990 that the New Zealand central bank became the first in the world to impose an inflation target of 0-0.002....Econospeak
Using these measures, inflation was soft again in May. Overall these measures are mostly below the Fed's 2% target (Median CPI is slightly above).Low inflation with the unemployment rate also at historically low.
The Congressional Budget Office’s latest report on the budget outlook revealed (perhaps unintentionally) that fixating on Congress and the President as the central players in the federal deficit drama is a mistake. According to the CBO, the path the federal budget deficit will follow over the next 10 years is just as much (if not more so) a question of Federal Reserve policy.Multiplier Effect
Interest rates are a policy variable. This growth in debt-service costs, in other words, represents a choice. The question of whether or not it’s the right choice should receive a lot more attention in our popular discussions, alongside the obsession with “grand bargains” and the rest. We’re often told (in a near inversion of the truth) that rising budget deficits are the biggest near-term threat to the US economy. But if you look at what the CBO’s projection says about our collective priorities, what we see here is a decision to allow interest rates to rise at the expense of the deficit....
However, given some model of the interactions between unemployment, inflation, interest rates, and budget deficits, the question of what particular tradeoffs we are making, or should make, needs to be brought to the fore. One issue raised by the CBO’s projection is the Fed’s apparent commitment to place a 2 percent ceiling on inflation. Is maintaining this ceiling worth it, given the price that needs to be paid in terms of a more elevated unemployment rate and increased political pressure to reduce spending on essential government functions? How harmful would inflation in the 3–4 percent range be, given the costs of trying to avoid it? Whatever your answers are, these questions need to become a more routine part of the deficit debate, for the sake of better public understanding of the choices being made on our behalf.
The debate on Bernanke's views on inflation targeting -- whether it should be 2 or 4% -- as I noted in a previous post is peculiar, to say the least. After all the Fed has a dual mandate, and inflation preoccupations have to be tempered by the pressing question of unemployment. The preoccupation in some quarters is that the Fed already has already accepted as a matter of fact that it has single mandate (see here and here). It seems to me that critics (e.g. Krugman, DeLong and others) are correct for the wrong reasons.Read it at Naked Keynesianism
It's no secret some Fed officials have been looking into additional purchases of mortgage-backed assets to support the economy via the housing market. And once they started talking about it, market participants began to assume it was imminent. Moreover, the idea of additional easing popped up in the most recent minutes:A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication about the Committee's longer-run economic goals and policy framework.
So now we have a timeline - first, enhanced communication. Second, additional easing....
••••••
Could the Fed credibly commit to a higher inflation target and make actionable such a commitment? I think they can, but would need to announce they are making some permanent additions to the money stock and ease the expectation that the balance sheet expansion will be fully unwound at the first possible moment. In other words, to convince the public that you intend to raise the level of the price path relative to the existing path, you need to be willing to allow for the permanent increase in the money supply that would allow that to happen. Barring that, they can target the dollar directly and do what they won't do - buy foreign currency or foreign debt. But this is now a more academic than practical discussion. The Fed has a target. Period. End of story. [emphasis added]
The U.S. central bank may well get an inflation target this year, a top Federal Reserve official said Thursday.St. Louis Federal Reserve Bank President James Bullard.
“We are very close” to tying monetary policy explicitly to some measure of overall inflation, Federal Reserve Bank of St. Louis president James Bullard said. He said the Fed may also be near making a collective statement about what level of unemployment is the natural rate, below which inflation pressures tend to rise.Read it at the Wall Street Journal
