Hard-won credibility is crucial to the Fed's two-pronged strategy of combining the maintenance of price stability with active short-term countercyclical interest rate policy. In recent years, credibility has enabled the Fed to preempt inflation without precipitating recession and to counter the destabilizing effects of real shocks without arousing inflationary expectations. Always fragile, credibility is best ensured if written into law and rendered immune to the vagaries of changing leadership. A congressional mandate transforming implicit inflation targeting into explicit, quantitative targeting would preserve the Fed's credibility so that it may effectively forestall departures, both inflationary and deflationary, from price stability.
Our Research Focus: Inflation and Monetary Policy
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