Daily Archives: September 16, 2012

The Fed’s actions last Thursday have been widely seen as a fundamental shift in its monetary policy, and its communications with the public. The tone of the FOMC’s statement, and of the Chairman’s subsequent press conference, clearly gave much less weight to the control of inflation than usual, and much more weight to the need to achieve a substantial reduction in unemployment. Certainly, the latest round of quantitative easing is the first to have occurred with little or no threat of deflation in the offing, and markets have responded by raising inflation expectations significantly.

It is hard to argue with the markets on this. In fact, it is even possible that the Fed leadership is becoming comfortable with the notion that inflation might exceed its 2 per cent long term target for a while. If so, this would be a very significant step, representing the first such move by any of the major central banks since the 1990s.

Until now, the standard mantra among the major central banks has emphasised an inflation target of around 2 per cent, and policy has usually been set with that primary objective in mind. Unemployment, meanwhile, has been left to adjust automatically towards its “structural” rate over a horizon of several years. Mr Bernanke indicated last week that he is no longer satisfied with this approach.