From SF Fed John Williams:
Anyone who knows me, or has listened to my speeches, will notice three recurring themes. The first, and foremost, is that monetary policy is data-driven. I am so data-focused that I literally had a T-shirt made to express my personal policy mantra. The second is that I think patterns and history are important indicators of our economic present and future—they are, frankly, just another form of data to be mined. As is the case with the effect that wages have on overall inflation, sometimes the theory doesn’t play out in practice, and history is an eloquent teacher. The third is that I believe policymakers have to be very careful about not reacting to blips. This again is an extension of the “data, data, data” view: We have to look at what’s happening in the economy not just today, not just this month, but over the medium term, analyzing trends and looking at multiple indicators.
That’s why we should be very circumspect about reacting to short-term fluctuations in commodity or other import prices. Just as the Fed didn’t immediately intervene in the spring of 2011, when inflationary pressures from oil and import prices were going up, we shouldn’t jump the gun now that they’ve gone down. I take a perspective that looks one or two years ahead, which research shows is the minimum amount of time it takes for monetary policy to have its full effect (Havranek and Rusnak 2013). What I’m considering is what impact those factors that are currently unfolding—movements in the U.S. economy, weakness abroad, oil prices—will have not next week or next month, but later this year and the year after that and the year after that. My goal is policy that meets the needs of the path we’re on, not where we’re standing this second.
With that in mind, history and experience show that energy price swings leave an imprint on inflation in the short term, but don’t affect underlying inflation rates over the medium term (Evans and Fisher 2011, Liu and Weidner 2011). The same holds true for movements in the exchange value of the dollar: They obviously affect inflation in the short run, but they don’t have much of an impact further down the road (Gust, Leduc, and Vigfusson 2010).
I’m therefore looking at underlying rates of inflation. Fed economists are frequently accused of neither eating nor driving, because we prefer to measure “core” inflation, which excludes food and energy prices. For the average consumer, those matter a lot—you can’t talk about what a dollar can buy if you don’t look at those products. But for economic trends, and for guiding monetary policy, measures of inflation that remove the most volatile components, like core or “trimmed mean” inflation, give a better lay of the land (see FRB Dallas 2015).
And here´s the “lay of the land” for the past decade or so.
The question that jumps out: Why the FOMC´s ‘state of mind’ was so different, in fact, diametrically opposite, in 2008. Here´s from Bernanke´s summary at the June 2008 FOMC meeting:
My bottom line is that I think the tail risks on the growth and financial side have moderated. I do think, however, that they remain significant. We cannot ignore them. I’m also becoming concerned about the inflation side, and I think our rhetoric, our statement, and our body language at this point need to reflect that concern. We need to begin to prepare ourselves to respond through policy to the inflation risk; but we need to pick our moment, and we cannot be halfhearted. When the time comes, we need to make that decision and move that way because a halfhearted approach is going to give us the worst of both worlds. It’s going to give us financial stress without any benefits on inflation. So we have a very difficult problem here, and we are going to have to work together cooperatively to achieve what we want to achieve.
The last thing I’d like to say is on communications. Just talking about communications following this meeting, I’d like to advise everyone, including myself, to lean, not to lurch. That is, we are moving toward more concern about inflation
One answer might be that there is an asymmetry in FOMC thinking. When oil (and commodity) price goes up, the risk to inflation rises, so policy must tighten. But when oil prices goes down, they shouldn´t be concerned (or react) about too low inflation. “Keep policy steady, but be prepared to tighten”!
And note that between 2011 and mid-2014, both headline and core were coming down even though oil prices were stable!