What really drives inflation
In a recently available speech in Jackson Hole, Fed Chair Jay Powell organized the Fed’s new monetary policy framework. Under this framework, the Fed allows inflation to perform above its 2% target to be able to boost employment carrying out a downturn. The brand new framework marks a departure from the perceived wisdom of the 1970s’ Great Inflation. Under this perceived wisdom, the Fed must respond aggressively to rising inflation or risk losing its credibility and letting inflation spiral uncontrollable. New research on the fantastic Inflation challenges this perceived wisdom and will be offering a fresh explanation for what really drives inflation. Rather than Fed credibility, this explanation puts the economic climate and how it transmits monetary policy front and centre. In doing this, it reconciles the 1970s with the existing environment and a foundation for understanding why the Fed’s new framework is unlikely to trigger runaway inflation.