#71 Liberalism And Central Banking

This newsletter is really a public policy&#160;thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question:&#160;how do I think about a particular public policy problem/solution?<br/><br/>Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.<br/><br/>PS: If you enjoy listening instead of reading, we have this edition available as an audio narration courtesy the good folks at&#160;<a href="https://www.ad-auris.com/">Ad-Auris</a>. If you have any feedback, please send it to us.&#160;<a href="https://publicpolicy.substack.com/account/add-podcast">Listen in podcast app</a><br/><br/>- RSJ<br/><br/>The Chairman of US Federal Reserve, Jerome Powell, in his speech at the annual Jackson Hole symposium signalled a <a href="https://www.cnbc.com/2020/08/27/powell-announces-new-fed-approach-to-inflation-that-could-keep-rates-lower-for-longer.html">significant shift in its approach</a> to tackling inflation. He had his reasons:<br/><br/>&#8220;The persistent undershoot of inflation from our 2 percent longer-run objective is a cause for concern. Many find it counterintuitive that the Fed would want to push up inflation. After all, low and stable inflation is essential for a well-functioning economy&#8230;. <br/><br/>However, inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.&#8221;<br/><br/>Fed&#8217;s Average Inflation Targeting Regime<br/><br/>This isn&#8217;t a surprise. An &#8216;ever-lower&#8217; inflation expectation would lead to a lower i