why don't most folks ?
because a naughty myth blinds us from the easy truth:
"..... the phony “credibility” issue."
"The claim is that Central Banks had to fight hard in the 1970s and early 1980s
to get markets to believe they were serious about inflation. "
"Fortunately, that is simply not true. "
"Markets have little difficulty figuring out what central banks are up to. "
"When the central bank wants to reduce inflation (as they did after 1981) markets believe them."
" When they didn’t want to, markets didn’t believe they’d lower inflation. "
"There never was a credibility problem."
".. this myth was partly due to a misreading of the early Volcker years. "
"Volcker took over at the Fed in the fall of 1979, but it wasn’t until two years later that inflation started to fall significantly. But there shouldn’t be any big mystery as to why inflation didn’t fall earlier, money wasn’t tight earlier. For instance, in the spring of 1980 Volcker cut the fed funds rate from 17.6% to 9.0%, despite the fact that inflation in 1980 was over 13%, the highest in my entire lifetime. "
"Why would Volcker have done such a stupid thing? Why slash rates sharply (driving real rates far below zero) when inflation was running 13%? BECAUSE HE WASN’T FOCUSED ON INFLATION, HE WAS TARGETING REAL GDP. And we were sliding into recession in the first half of 1980....."
