In “What we must still learn about the great inflation
disaster” (April 28, 2024), Martin Wolf is correct in arguing that the Bernanke
Report on the Bank of England’s forecasting performance was too narrowly
focused. Shocks that are hard to forecast do happen, but, as Wolf asks, “… is
it plausible that the fiscal and monetary policies that drove demand levels so
strongly had nothing to do with the inflation?”
In 2021, statements by central bankers certainly gave the
impression that inflation would simply fall away once shocks had passed,
without making any explicit link to the monetary policy needed to ensure this occurs.
The 1970s illustrated the dangers of treating inflation as if it were somehow unrelated
to monetary policy. A surreal exchange captured in the transcript of the Fed’s
policymaking committee meeting on September 9, 1978 is revealing. Lawrence K.
Ross, President of the St. Louis Federal Reserve Bank, expressed exasperation
as inflation rose towards 8 percent, said “I’m not trying to be critical, but
is our monetary policy responsibility such that we should maybe discuss whether
we’re satisfied to see the economy drift into an 8 percent inflation rate? And
if not, are there things we can do to affect this? …Are we in any way masters
of what happens, or are we merely observers on the sidelines? I’m lost...” To
which Fed Chair G. William Miller drew upon the U.S. Constitution’s 5th
Amendment protection against self-incrimination in responding “I take the
fifth.”
One would hope that no central banker today would fail to
connect inflation developments to monetary policy actions. Yet focusing on
forecasting errors seems a convenient way for policymakers to shift blame for
errors onto the Bank’s staff. If inflation targeting is to have teeth, it is
the policymakers who should be held to account when the target is so grossly
missed.
