Must-Read: Stephen Cecchetti and Kim Schoenholtz: The Fed’s Price Stability Achievement

Must-Read: Ummmm… No. The Federal Reserve’s inflation policy has been not an achievement but a mistake. Driving expectations of inflation so low that the economy spends half its time in a liquidity trap—as has been the case so far this millennium—is a substantial policy error, not an achievement.

As John Maynard Keynes wrote back in 1923:

Inflation is unjust and Deflation is inexpedient. Of the two perhaps Deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned…

“Achievement” is balance. “Achievement” is not falling out of balance to one side or the other:

Stephen Cecchetti and Kim Schoenholtz: The Fed’s Price Stability Achievement: “US monetary policy has been the target of substantial criticism over the years…

…This column outlines one key area where the Federal Reserve has done remarkably well–managing price stability.  Its ability to control inflation is a key reason that, for the sake of the US and global economies, the Fed’s independence should be preserved.