The Federal Reserve can't adapt to a new environment
Brad Delong takes a look at the Federal Reserve and the governance comes up lacking. The past 20 years have changed the rules of the game, but the institution of the Fed has continued to fight the rules of the last war -- the great battle of the 70s and 80s with inflation.
Delong argues that all the recent shocks: "the US savings and loan crisis in the 1980s and 1990s, the 1997 Asian crisis, the 2000 dot-com bust, the terrorist attacks of September 11, 2001, the 2007 subprime collapse that began in the US, and the 2010 European debt crash" have been deflationary but that the Fed hasn't been able to adapt or prepare for the next one.
He suggests:
- The inflation target should be 4%, not 2%
- The Phillips curve isn't as reactive or sensitive to a 'tight' economy as believed
- The yield curve is right
- That the structure of the Fed can't respond to deflation
