Reading the Fed minutes can sometimes make me want to tear my hair out. During the long recovery from the Great Recession, the Fed frequently told us that we could not do more stimulus due to the danger of inflation exceeding 2%. The taper tantrum was caused by Fed hints that monetary tightening was on the horizon, motivated by a fear of higher inflation. In 2015, the Fed began raising interest rates, with the goal of preventing inflation from overshooting 2%.
And now, with unemployment down to 3.9%, we are suddenly told that the Fed would actually welcome above 2% inflation? This makes no sense at all.
It was also noted that a temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.
Just to be clear, it’s perfectly fine to argue that the Fed should overshoot their 2% inflation target right now. Thus a market monetarist might favor overshooting for “level targeting” reasons. There are good arguments on both sides of that question, but it’s certainly a defensible argument. However these MMs that favor overshooting were also favoring more monetary stimulus during the recovery from the Great Recession.
What’s not defensible is to have have opposed additional monetary stimulus during the recovery from the Great Recession, even as inflation was running well under 2%, and then now suddenly favor above 2% inflation.
Most business cycles are caused by procyclical monetary policy. A monetary policy that causes inflation to run below 2% during periods of high unemployment and above 2% during booms is procyclical, and hence bad. Why does the Fed have so much trouble understanding such a basic point? I don’t get it.
I can already anticipate commenters talking about whether money is too easy or too tight without reference to the monetary REGIME. That’s just stupid. Monetary policy is not about whether the fed funds rate should be raised or lowered at a given meeting, it’s about what sort of policy regime you have. The Fed still hasn’t figured out that a procyclical policy regime is destabilizing. It’s the primary cause of the business cycle.
PS. I have a blog post at a new AEI symposium on how the US can best compete with China.