Monday, October 25, 2010

Credibility...part II

Mishkin backing the Fed and its ability to guard against inflation and inflation expectations (expectations being the more important indicator for the Fed these days).

By establishing an inflation objective at this juncture the Fed can guard against both of these problems. Providing a firm anchor for long-run inflation expectations would make the threat of deflation less likely.
But a firm anchor would also give the Fed flexibility to respond to the weakness of the economy – because it would help ensure that any new moves to quantitative easing would not be misinterpreted as
signalling a shift in the central bank’s long-run inflation goal, making an upward surge in inflation expectations less likely too.

So the Fed will not abandon anchors in the future, and has never done such things in the past...this bespeaks to a credibility problem for Mr. Mishkin, one that is detailed in the new movie "Inside job" (you can see a clip with Mr. Mishkin here).

Not exactly the ringing endorsement Bernanke was hoping for.

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