In a recent speech, Federal Reserve Chair Jerome Powell laid out the Fed’s new monetary policy framework, under which it will allow inflation to run above its 2% target in order to boost employment. This column presents a historical analysis of US monetary policy, arguing that the new framework marks a departure from the perceived wisdom of the 1970s. It is now argued that the real driver of inflation is centred on the financial system, instead of Fed credibility alone. The zero lower bound is also considered in light of the historical restrictions imposed by inflation ceilings.
Itamar Drechsler, Alexi Savov, Philipp Schnabl