When the Federal Reserve kept its federal-funds rate target low and engaged in large-scale asset purchases in the aftermath of the Great Recession of 2008-9, some critics, mostly but not exclusively on the right, worried that it was leading the way to a revival of inflation. Since inflation has run below the Fed’s target for almost all of the last decade, that criticism of its efforts has faded somewhat while another one has grown more widespread: that the Fed doesn’t have the power to increase inflation, and so its stimulative efforts are doomed to be ineffective even if they were desirable.
The Fed’s economic projections yesterday, which suggest that it’s going to keep undershooting its inflation target, might be taken to mean that its top officials agree that it is powerless. But Federal Reserve chairman Jay Powell said yesterday that he does not believe the Fed is “out of ammo.” And it is a mistake to read the last decade to mean that the Fed can’t raise inflation to two percent, or beyond. Remember, the Fed tightened money in 2015 and 2016 even while inflation was below its target. That’s not evidence that the Fed couldn’t hit its target; it’s evidence that it had priorities other than making sure that it did.