Ever since the financial crisis ended, monetary policy has been plagued by a central mystery: Why has inflation been so low? While unemployment decreased steadily and growth picked up, inflation consistently undershot the Federal Reserve’s inflation goal of 2 percent. Until this May, that is. Recent data revealed that, for the first time in six years, inflation was on target. Economists rejoiced, relieved that the economy was—finally—behaving the way their models predicted. Yet there is a nagging sense that though inflation has finally returned, the mystery has not yet been solved. If it took so long to hit 2 percent, is that the appropriate target in the first place? Is the current framework of our monetary policy due for a reckoning?
Background reading and multimedia:
- US Federal Reserve's steady tightening may be taking it too far
The FT View, Financial Times, July 18, 2018
- Alternatives to the Fed's 2 percent inflation target
David Wessel, Brookings Institution, June 7, 2018
- Economic conditions and the role of trade
Raphael Bostic, Federal Reserve Bank of Atlanta Speeches, May 9, 2018