The Federal Reserve and credibility
But the Federal Reserve isn't. "Raising the inflation objective would likely entail much greater costs than benefits," Ben Bernanke said in August. "Inflation would be higher and probably more volatile under such a policy, undermining confidence and the ability of firms and households to make longer-term plans, while squandering the Fed's hard-won inflation credibility."
Here's the thing about credibility: It goes both ways. The Federal Reserve can lose credibility by doing something that hurts the economy. But it can also lose credibility by being unable to help the economy. As Ryan Avent says, the Fed "needs to demonstrate that it can generate inflation if it has to." Or, barring inflation, something else that will get us moving.
The Fed has an increasing credibility problem. The economy is in terrible shape, and the central bank knows it. Its Tuesday release twice admitted that inflation is below what the Federal Reserve needs to fulfill its mandate. It's being criticized by a variety of economists for timidity, including by former members of its own staff.
There is a difference between a Federal Reserve that doesn't act because it's afraid that its actions won't work or will have negative consequences and a Federal Reserve that cannot act because there's nothing it can do. But not that much of one. And it's getting increasingly hard to tell the two apart. More worryingly, if the Federal Reserve keeps letting things get worse, it will eventually need to intervene, and it will need to intervene when the economy is even harder to help, and the chances for failure will be even higher.
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