October 4, 2017

By embracing the wrong framework, the Fed has difficulty understanding low inflation

Low inflation has bothered the Fed no end. Two years ago, Yellen “crunched” inflation in a speech titled Inflation Dynamics and Monetary Policy. She concludes: I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by… Read More

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