The Federal Reserve relies, in part, on its light monetary policies on the fact that its preferred measure of inflation has passed more than half a percentage point below its target for several years.
With inflation so low for so long, he thinks, the Fed can keep interest rates very low for a while to help grow the economy as it recovers from the effects of the coronavirus pandemic.
This raises an important question: Does the central bank think correctly about inflation?
The Fed defines its inflation target in terms of consumer prices, such as those we pay for cars, toothpaste and haircuts. But in recent decades, prices have often risen much faster for investment assets, such as housing and stocks, and have led to double-digit increases and bankruptcies followed by recessions.
If the Fed is facing problems with the low interest rates it helped draft, it could be because of asset prices and not consumer prices.