The Fed (and other central banks) wants an easy time

And nothing has been easier for the last couple of decades than “keeping inflation on target”. Adam Posen has a critique:

Complaints about public officials’ short time horizons are well rehearsed: the gripe is usually that too many activist policies result from pandering to voters and special interests. But the reality is that measures are often discarded before they have a chance to work. Then, having not really tried, policy makers claim that the target was unattainable. In macroeconomics, it is the unemployed who suffer most from this repeated failure to follow through.

And concludes:

The costs of pushing a bit too far are small and reversible. But the costs of letting unemployment persist are vast. Even reforms to reduce structural unemployment, which worked in Germany a decade ago or in the US a decade before that, only take effect in an expanding economy. There is no good reason for the Fed to give up on the labour market – and thus no good argument for allowing the de facto tightening of monetary conditions to stand.

But, as I said, central bankers enjoy their golf matches. That being so, it´s much easier to “hang on to what we´ve got”! Bernanke´s answer to Senator Corker last February is telling:

“You called me a dove, well maybe in some respects I am, but on the other hand my inflation record is the best of any Federal Reserve chairman in the postwar period. Or at least one of the best, about 2% average inflation.”

But let´s check the “misery index” (coined by Arthur Okun in the 1960s, measured as the simple sum of two “negatives”: inflation and unemployment). The chart shows how the index has behaved over the last quarter century of low inflation:

It seems there´s work to be done!

HT Patricia Stefani