In a previous post, I argued that Paul Volcker didn’t put a stop to inflation by having the Fed systematically increase interest rates when commodity prices rose, and lower them when commodity prices fell. While commodity-price targeting, aka a “price rule” for monetary policy, had some prominent proponents back in the 1980s, neither Volcker nor any other Fed chair embraced the idea.
Today’s post has to do with two things that I didn’t say in that earlier one. I didn’t say that commodity price movements played no part at all in the Fed’s decision-making. And I didn’t say whether they should or shouldn’t play any part in it. I plan here to review studies of the actual role commodity price movements have played in the Fed’s monetary policy decision-making, as well as ones that ask whether the Fed would do a better job if it let them play a bigger one.
This post is, I warn you, both long and very wonkish. But if the Fed is to consider once again the possibility of basing its monetary policy decisions on the behavior of commodity prices, it’s useful to take account of what a substantial body of previous research has had to say on the topic.