Explaining the Fed Credibility Argument
Following up on my last post, I actually think that there are two possible explanations for the “Fed Credibility” argument’s wide deployment, both hinted at in Simon’s response to my comment:
I think the credibility argument is really about the underlying motives of the policymakers, rather than their abilities. However I also think that argument is overdone – it takes a few generations to forget the lessons of the past, and policymakers are still obsessed with the 1970s.
In my words, two possibilites:
1. It’s a smokescreen. Actual reason: Creditors hate (unexpected) inflation. One extra percentage point transfers hundreds of billions of dollars of buying power from creditors to debtors, annually. ‘Nuf to get a fellow’s attention. The Fed is run by creditors.
2. (70s) They actually are worried — that the higher inflation target won’t work in goosing the economy or employment, so they’ll run into a stagflation situation where stomping on (spiraling?) inflation is…problematic. So they won’t be able to fulfill the second half of their promise without causing a job recession a la Volcker. Rock and a hard place.
I don’t really know what you’re talking about here.
I am sure that the Fed has no conventional techniques for increasing wage inflation, so the whole conversation is surreal…
Maybe the more fundamental problem is the diagnostic.
For all my life monetary policy makers have trained themselves and the markets to see increases in Real Wage as inherently inflationary and decreases in unemployment metrics a signal for imminent pressure to boost wages accompanied by a reluctance to believe such increases could ever translate to Real Wage, I.e increasing the breadth of purchasing power instead of driving prices up via more dollars chasing the same pool of goods. Which I guess is why working class people aren’t supposed to have nice things.
That is despite the two opposing counter indicators of 70s-80s stagflation and late 90s combo of actual increases in Real Wage without totally offsetting inflation the Fed, driven IMHO by the Governors from the regional banks, insist that we continue to sacrifice workers on the Alter of NAIRU. Apparently the actual baptismal name of the Confidence Fairy.
The business press is perhaps the worst offender here, it makes me want to throw things at the TV every time the Cavuto types react with alarm to any good news for workers by invoking “worrisome signs of inflation” for investors. And call for the Fed to “tap the brakes”. You know, just to be sure.
Naive people might even think there was some class warfare thing bubbling under the surface. Naaaaah! That is just crazy talk.