Monetary Policy Lessons For The Federal Reserve

By Desmond Lachman

In his Jackson Hole speech last week, Federal Reserve Chair Jerome Powell enumerated a number of lessons that are now guiding his thinking as to the appropriate stance of monetary policy. Notable in his speech, however, was his failure to mention several even more relevant lessons in today’s economic setting. That omission is likely to keep the Fed on an overly hawkish monetary policy action course that will produce an unnecessarily hard economic landing.

It is difficult to take exception to Powell’s assertion that the Fed can and should take responsibility for delivering low and stable inflation. Nor can one argue with his view that public expectations about inflation play an important role in setting the path of inflation over time and that the Fed should keep at it until the job is done.

But one can bemoan that Powell continues to ignore probably the most important lesson from past monetary policy experience on which almost all economist can agree. It is that monetary policy operates with long and variable lags.

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