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c. tODAY
IWnhaftlDaetteirominnes
? A Mystery
Worth Solving.
By J.D. Foster, Senior Vice President, Economic Policy Division,
and Chief Economist, U.S. Chamber of Commerce
The recent focus on possible nominees to the This was brought to light in remarks
Federal Reserve, as well as suggestions by President made in 2016 by then Fed Chair Janet
Trump as to how the Fed should execute monetary Yellen (right). Yellen posed four
policy, occasion considering a related topic given too issues on which she thought the
little attention – what exactly determines inflation? economics profession needed to
focus, the fourth of which being,
The Fed’s dual mandate is to pursue stable prices and “What determines inflation?”
maximum employment (along with low interest rates).
As to prices, the Fed interprets its mandate to mean This was an astounding question for the Fed
low and stable annual inflation of about 2%. On this, Chair to ask. It’s not as though she hadn’t given the
the Fed has been remarkably successful. In 2018, the matter some thought. It was all the more remarkable
core Personal Consumption Expenditure index (PCE), given the Fed’s legion of top economists and
a common measure of inflation, rose 1.9%. For the last demonstrated recent success in keeping inflation very
quarter century the PCE varied in a fairly narrow range near its target.
from 1.2% to 2.3%.
It’s not that economists haven’t sought explanations
The stability of inflation over this period is all the for inflation, or haven’t developed highly sophisticated
more remarkable considering the changes and shocks theories of macroeconomics or monetary theory over
the economy has withstood over the period. Among a few hundred years. The issue isn’t the effort, but the
the notable changes is the rapid evolution of financial theoretical results, as Yellen pointed out, are not very
markets and the advances in information technology, satisfactory as guides to policy.
while shocks have included the dot-com bubble, a
couple wars, China’s accession to the World Trade For example, one intuition from any of the variations
Organization and subsequent massive trade surpluses, of the popular Phillips curve is inflation will tend to
and, of course, the 2008-2009 financial crisis and Great tick up when the unemployment rate or some other
Global Recession. measure of economic slack suggests the economy is
at or near full employment. A seemingly reasonable
While critics may harp on inflation coming in a proposition, except the theory so often and obviously
tad below the Fed’s goal, in fact it would seem more fails. The unemployment rate has been below 5% for
appropriate to congratulate the Fed on its performance three years and currently stands at 3.6%, yet inflation
viz-a-viz inflation for a job reasonably well done. remains quite indifferent.
Except for one little thing – the Even if Phillips curves variations showed a rare
Fed isn't sure why its policies glimmer of promise, the trouble remains the theory
are working. doesn’t say much about the initial rate from which
inflation would rise. Some versions attempt to solve
the problem by anchoring the model on future
23 AmCham South China
IWnhaftlDaetteirominnes
? A Mystery
Worth Solving.
By J.D. Foster, Senior Vice President, Economic Policy Division,
and Chief Economist, U.S. Chamber of Commerce
The recent focus on possible nominees to the This was brought to light in remarks
Federal Reserve, as well as suggestions by President made in 2016 by then Fed Chair Janet
Trump as to how the Fed should execute monetary Yellen (right). Yellen posed four
policy, occasion considering a related topic given too issues on which she thought the
little attention – what exactly determines inflation? economics profession needed to
focus, the fourth of which being,
The Fed’s dual mandate is to pursue stable prices and “What determines inflation?”
maximum employment (along with low interest rates).
As to prices, the Fed interprets its mandate to mean This was an astounding question for the Fed
low and stable annual inflation of about 2%. On this, Chair to ask. It’s not as though she hadn’t given the
the Fed has been remarkably successful. In 2018, the matter some thought. It was all the more remarkable
core Personal Consumption Expenditure index (PCE), given the Fed’s legion of top economists and
a common measure of inflation, rose 1.9%. For the last demonstrated recent success in keeping inflation very
quarter century the PCE varied in a fairly narrow range near its target.
from 1.2% to 2.3%.
It’s not that economists haven’t sought explanations
The stability of inflation over this period is all the for inflation, or haven’t developed highly sophisticated
more remarkable considering the changes and shocks theories of macroeconomics or monetary theory over
the economy has withstood over the period. Among a few hundred years. The issue isn’t the effort, but the
the notable changes is the rapid evolution of financial theoretical results, as Yellen pointed out, are not very
markets and the advances in information technology, satisfactory as guides to policy.
while shocks have included the dot-com bubble, a
couple wars, China’s accession to the World Trade For example, one intuition from any of the variations
Organization and subsequent massive trade surpluses, of the popular Phillips curve is inflation will tend to
and, of course, the 2008-2009 financial crisis and Great tick up when the unemployment rate or some other
Global Recession. measure of economic slack suggests the economy is
at or near full employment. A seemingly reasonable
While critics may harp on inflation coming in a proposition, except the theory so often and obviously
tad below the Fed’s goal, in fact it would seem more fails. The unemployment rate has been below 5% for
appropriate to congratulate the Fed on its performance three years and currently stands at 3.6%, yet inflation
viz-a-viz inflation for a job reasonably well done. remains quite indifferent.
Except for one little thing – the Even if Phillips curves variations showed a rare
Fed isn't sure why its policies glimmer of promise, the trouble remains the theory
are working. doesn’t say much about the initial rate from which
inflation would rise. Some versions attempt to solve
the problem by anchoring the model on future
23 AmCham South China
