This is the picture of headline and three core measures of the CPI inflation. The “cynics” are peddling the headline for target. Let´s assume they are correct to do so. In 2008 it appears from the FOMC statements that the Fed was very worried with the headline numbers. The rest of the story we know well.
So in 2009 they would have brought rates down. But wait, rates were already at zero…so there´s nothing MP could do (and to appease their conscience, unemployment was deemed “structural”).
Recently headline has climbed above the magic 2% so the vultures are out in droves. Wait there´s more. Among the “cynics”, the biggest cynic – Kocherlakota – does not appeal to the headline number. He says that IF MP was adequate at the end of 2010 with core rates between 0.6% and 0.8%, MP should be prepared to tighten now that core inflation is between 1.2% and 1.5%
If you make the assumption that at the end of 2010 that policy was appropriately accommodate, so neither too loose nor too tight, then you see core inflation go up by 50 basis points over the course of 2011, the usual response to that we know from 20 years of thinking about monetary policy or even more is to raise the target rate by even more than that increase in observed inflation. So that would mean you should raise your target rate by more than 50 basis points. The usual number is a 1.5 coefficient that Taylor has, so that would be 75 basis points. So this is saying that if you take monetary policy as being appropriate, just right at the end of 2010, then at the end of 2011 if you see this increase in inflation you should be responding to it by raising rates.
Given the state of the economy, inside a deep “hole” out of which it is only beginning to do a “sideways crawl”, MP was certainly not appropriate!
On the other side are the “doves” – Yellen, Evans and Dudley – which don´t get as much press. Bernanke, in the middle has a tough balancing act ahead of him. And still in “cold storage” the nomination of Peter Diamond for Fed governor.