The Need For Central Bank Accountability

Brad DeLong notes the evidence that the Federal Reserve has secretly changed its unofficial inflation target from around two percent to around one percent:

But the personal consumption expenditure deflator (excluding food and energy) has not seen a 2 percent er year growth rate since late 2008: over the past four quarters it has only grown at 0.9 percent. At a 3.5 percent real G.D.P. growth rate, unemployment is still likely to be at 8.4 percent at the end of 2011 and 8.0 percent at the end of 2012 — neither of those levels of unemployment would put any upward pressure at all on wage inflation.

It thus looks like 1 percent is the new 2 percent: with current Federal Reserve policy, we are looking forward to a likely 1 percent core inflation rate for at least another year, and more likely three. If the Federal Reserve were aiming for a 2 percent per year inflation rate, it would be aggressively employing stimulative policies right now. But that is not what the Fed is doing.

Note that the Fed did something similar to this after the recession in the early 1990s. Previous to that, Paul Volcker had slain the beast of inflation and then Ronald Reagan delivered the strong “Morning in America” recovery of 1983-84. During that recovery and its subsequent continuation throughout Reagan’s second term, inflation ran around four percent. But after the recession during the George H.W. Bush administration we had a relatively weak recovery and inflation was throttled down to about two percent. Nobody explained why this was done nor is anyone explaining whether or why the Fed has decided to give us a weak recovery in 2010-2011 and bring its inflation target further down. This is the essence of the no accountability Federal Reserve I wrote about for Democracy. Giving a central bank operational independence to conduct monetary policy is great, but there’s no reason on earth monetary policymakers should be allowed to keep secret, arbitrary targets that they switch without explanation.

Here video of a panel I was on yesterday<