I’ve focused on advocating three major policy changes:
1. Target the market forecast.
2. Level targeting.
3. Do “whatever it takes” to achieve the target.
Obviously the Fed is now relying more heavily on market forecasts than in the past. In addition, average inflation targeting is being considered as part of the Fed’s review of its policy regime—that’s sort of like level targeting. So the other major challenge is getting Fed people to think in terms of a “whatever it takes” approach to policy, especially at the zero bound.
This is from a recent speech by Charles Evans, president of the Chicago Fed. I decided to bold the good parts:
In terms of a broad monetary policy strategy, I favor a powerful, full-throated commitment to follow outcome-based monetary policies aimed at achieving maximum employment and symmetric 2 percent inflation within a reasonable time. The best tactics to achieve these outcomes may change over time. For example, at times this approach could prescribe forward guidance with thresholds that need to be met before changing rates. At other times, it could prescribe overshooting our 2 percent inflation objective with momentum. The point is to focus on our objectives—and not on the specific operational tools used to obtain them.
Importantly, in a world where monetary policy is challenged by low equilibrium rates and elevated odds of hitting the ELB, outcome-based policy calls for a relentless focus on our symmetric 2 percent inflation objective throughout the cycle. We have to have a “do-whatever-it-takes” attitude toward policy all the time—in a downturn, when we are constrained by the effective lower bound, as well as in an expansion, if inflation remains stubbornly below our objective.
I recognize and accept that monetary policy will never be a panacea to all the negative shocks hitting the economy. But when it comes to price stability, the monetary authority has the sole responsibility for achieving an inflation objective. For us, that is symmetric 2 percent inflation.
My God! I could have bolded almost the entire quotation. It’s all “good parts”.
My favorite part is where Evans suggests that fiscal policy should play no role in achieving the inflation objective.
HT: Alex Schibuola
