In today’s Washington Post Robert J. Samuelson has raised the possibility that the Federal Reserve may be setting the US up for a reappearance of inflation. He invoked the 1960s and 1970s when supposedly the Fed allowed inflation to get out of control out of a supposedly misguided effort to bring down unemployment by allowing successive small increases in inflation. Supposedly the newly released report on changed Fed policies may be taking us back to those bad old days, even though for now RJS admits that inflation is low, with expectations of inflation only at 1.34%. How worried should we be?
OK, I am not going to say that a resurgence of inflation is impossible. I can imagine it possibly resurging, with such a development perhaps being associated with a sharp decline of the US dollar, perhaps associated with a turn from its use as a reserve currency. I do not see that happening immediately, but there is theoretical literature that suggests that such an event could happen rather suddenly at some point. If so, then maybe it could happen. Is the new Fed policy likely to bring this on?
I suppose one reason to be concerned is that the supposedly new policy approach has been rather opaque. I have had trouble getting a clear picture what the changes are in the policy. The main reports have been relatively undramatic, basically an idea that at least through the next year there will be no interest rate increases. Probably a bigger deal is that the Fed might tolerate inflation higher than the 2% targeted rate.