Transmission Mechanism with Too Many Weak Links

Willem THORBECKE
Senior Fellow, RIETI

Sir,
Myron Scholes is correct that the US Federal Reserve should not focus on a 2 per cent inflation target ("Controlling inflation should no longer be the central bankers' focus," Insight, November 2). The transmission mechanism between the Fed's policy instruments and the 2 per cent inflation target contains too many weak links. A Fed-induced increase in aggregate demand, for instance, may increase nominal wages and prices but the magnitude of the effect is uncertain. Trying to hit a 2 per cent target with engineering precision will not work. Worse, missing this target will damage the Fed's most valuable asset: its credibility.

November 6, 2017 Financial Times

October 5, 2018