Policy implications in paper by veteran Jeremy Rudd appears to be an indictment of its policy framework
US Federal Reserve chair Jerome Powell. Picture: BLOOMBERG/AL DRAGO
Fed watchers had varying interpretations of Rudd’s paper. Some saw it as validating the new policy framework about inflation, which aims for observed price growth that modestly overshoots 2% for some time rather than making decisions based on potentially erroneous forecasts. Others viewed it as a warning: counting on surveys that show stable longer-term inflation expectations runs the risk of missing a real-time regime shift in the economy.
This is what Rudd suggests on monitoring for evidence of an inflation regime shift: “One development to watch for would be any evidence that a renewed concern with price inflation was starting to affect wage determination — either in statistical form … or in the form of anecdotes.
Should the quits rate stay elevated for many more months, however, it might raise concern that cost-of-living increases are starting to become front and centre in the minds of workers. As my Bloomberg Opinion colleague Noah Smith wrote earlier in September, even though US wages have been rising strongly lately, on an inflation-adjusted basis, they are lower than they were in May 2020.
The Fed wants to talk a big game on inflation and push expectations higher because policymakers believe that will keep price growth above their 2% target. Rudd argues that:Policymakers should strive to keep inflation off people’s radar; and“I view Rudd’s policy implications as an indictment of the Fed’s new policy framework,” Tim Duy, a former Bloomberg Opinion contributor who is now chief US economist at SGH Macro advisers, wrote in a report. “There is clearly some internal conflict.
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