Against the backdrop of the Covid-19 pandemic and the extraordinary monetary policy measures to stabilize the economy and the financial system, it has almost been forgotten that the U.S. Federal Reserve Bank (Fed) is in the process of rethinking its monetary policy strategy. It is to be expected that the Fed will publish its new monetary policy strategy soon – possibly in mid-September. The new strategy will likely have effects on the inflation target. Up to now, inflation – measured by the index for personal consumption expenditures – of two percent has been the target. What is important, but has sometimes been forgotten: the inflation target is symmetrical, so small deviations up or down are tolerated. A slight overshoot of inflation would therefore also be accepted at the moment.
In its new strategy, the Fed could now commit itself to accepting larger deviations in the future and, in particular, targeting the two percent target as the medium-term average. This would mean that a year-long undershoot of the inflation target – as was the case in previous years, would in the future be compensated for by a temporary overshoot.
I think a reform in this direction would be good. In recent years it has become clear that central banks seem to find it more difficult to precisely influence inflation. Perhaps this is due to globalization and technological change – at the moment, these real factors may have a greater impact on inflation than monetary policy. I write “presently” – so it does not have to be that this is the case forever. In a situation like this, it is right not to believe that inflation can be precisely controlled. The Fed should, in my opinion, communicate more strongly that inflation within a certain range – and not a single number – is compatible with its mandate.
Let’s wait and see what new strategy the Fed is likely to tell us in mid-September.
Sometimes, my readers would like to make a donation. If you decide to do so, thank you very much.
$1.00