The Fed Credibility Argument

For once a short post, inspired by Simon Wren’s suggestion that the Fed should allow (encourage) a temporary rise in wage inflation. (The merits of such a policy being obvious to many of us given the current virtues of some extra inflation, and past decades’ wage trends.)

I’ve never understood the credibility danger of the Fed announcing and executing a temporary increase in the inflation target.

If the Fed said “we’re going to let (wage) inflation float a bit higher until the economy’s moving strongly back up toward capacity, then we’ll bring it back down,” and then did exactly that, wouldn’t that greatly enhance its reputation for being able to control inflation?

Cross-posted at Angry Bear.