Although dedicated Fed watchers long saw it coming, the big news from Jackson Hole is that the Fed now has a new monetary policy strategy—the crowning achievement of the much-ballyhooed review of its “Strategy, Tools, and Communications” it launched in early 2019. It’s called “average inflation targeting,” and chances are that if you’re reading this you’re wondering (1) what the heck it means and (2) what, if any, difference it will make.
Don’t feel bad. More than a few seasoned monetary economists have been asking themselves the same questions, myself included. Having come up with some answers, I thought to share them with you, together with my reasons for concluding, first, that the new strategy isn’t likely to improve things; and, second, that the Fed has missed a chance to adopt a different strategy that really would work better.
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