The Fed Credibility Argument
For once a short post, inspired by Simon Wren’s suggestion that the Fed should allow (encourage) a temporary rise in wage inflation. (The merits of such a policy being obvious to many of us given the current virtues of some extra inflation, and past decades’ wage trends.)
I’ve never understood the credibility danger of the Fed announcing and executing a temporary increase in the inflation target.
If the Fed said “we’re going to let (wage) inflation float a bit higher until the economy’s moving strongly back up toward capacity, then we’ll bring it back down,” and then did exactly that, wouldn’t that greatly enhance its reputation for being able to control inflation?
Cross-posted at Asymptosis.
It would, but what if they failed?
The Fed has no power over wages. Well let me put it this way. Expansionary monetary policy by definition makes the prices of some things rise but of what central banks have no control. The mechanisms of monetary expansion operate firstly in the financial markets and therefore that is where the inflation mainly lies.
For 25 years the Fed has been ‘activist’ and usually expansionary and has done everything within its power to encourage credit expansion and not one year did wages outpace CPI. That is a long record.
Would Mr. Ross please explain how the Fed can raise wages? Keeping in mind the record of the last 25 years. Please do not resort to the power of the Feds words. By what mechanism can the Fed induce wage inflation?