In my post from yesterday, I said:
I think a policy of “opportunistic reflation” – being somewhat less-vigilant about fighting inflation so long as we remain under the long-term price trend – makes sense in current conditions. It would also make sense for Bernanke to say that improvements in the productivity of the real economy should give the Fed more room to keep monetary policy loose without worrying about inflation. That would be a signal to the market that the Fed is looking for good policy to help it out, and not planning to choke growth off as soon as it appears – which would remove a source of uncertainty. But these do not constitute a radical change in framework, just a change of emphasis within the existing framework, a change that recognizes that recession and outright deflation remain real risks, and that we need to be more vigilant about these than about inflation. That’s a change that has already taken place to some extent, and the evidence is that the Fed continues to use non-traditional monetary policy to insure that we don’t fall back into recession. It would be a good idea, from an expectations perspective, for the Fed to make that change of emphasis clear, but again, that doesn’t require a shift in framework.
That’s not quite what the Fed suggested in its guidance, but the Fed did talk about an “inflation rate consistent with its dual mandate” rather than simply staying under an inflation target, that “the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.” Which is pretty close to what I’d be looking for as a “change of emphasis” – an indication that the Fed is going to be slower than it historically has been about tightening at the first sign of inflation because it wants to make sure we get a sustainable recovery going.
In my opinion, that’s about the most the Fed can do, regardless of the “framework.” Now it would be nice to see the legislative branch of government start to function again. Maybe after the election.