Despite widespread use by commentators and policymakers, the models commonly used to argue for the importance of "inflation expectations" are difficult to confirm empirically, and risk a hawkish policy bias.
Whenever inflation becomes a part of political or economic discourse, policymakers and commentators instinctively reach for narratives and models drawn from the experience of the 1970s inflation. However, these models offer little explanation for even adjacent experiences of inflation.
Given the Fed’s recent framework revisions and forward guidance commitment to maintain current interest rates until “maximum employment” is achieved, the Fed’s communication with respect to its assessment of “maximum employment” is overdue for a clarification.
The Framework Review and Forward Guidance center labor market outcomes over inflation in evaluating interest rate policy. However, the Fed haven't clarified how they will evaluate inflationary dynamics under the new regime.
Given Mnuchin’s stated intent to act in violation of the CARES Act, Chair Powell should reconsider his decision to transfer the funds back to Treasury, or at least clarify that they are for the sole purpose of being returned to the Exchange Stabilization Fund.
