The Fed’s track record of keeping inflation below its own target has complicated efforts to stimulate the economy. Years of emphasizing flexibility in policy decisions leaves its future policy choices subject to interpretation, limiting their impact.
Global Macro Perspectives: The Fed’s Credibility Problem The Fed’s new reaction function is the acknowledgment of a surprising problem: the central bank’s credibility is too high. Fed policymakers’ track record of keeping inflation not just low but below its own target has complicated efforts to stimulate the economy. We’re not convinced that the new reaction function solves the problem. The Fed’s prioritization of flexibility above all else in setting monetary policy leaves its future policy choices subject to interpretation, limiting the impact of the changes it has made. The result: the Fed won’t be able to achieve its objectives on its own, so fiscal policy has become the most important macroeconomic lever. facebook linkedin twitter youtube email print