The Federal Reserve partly predicts its easy money policy on the fact that its preferred measure of inflation has been more than half a percentage point below its target for several years.
Now that inflation has been so low for so long, it is thought, the Fed may hold interest rates very low for a while to boost the economy as it recovers from the effects of the coronavirus pandemic.
This raises an important question: does the central bank think well about inflation?
The Fed defines its inflation target in terms of consumer prices, such as what we pay for cars, toothpaste and haircuts. But in recent decades, prices for investment assets, such as homes and stocks, have often risen much faster, leading to boom and failure twice, followed by recessions.
If the Fed gets into trouble with the low interest rates it helped develop, it could be because of asset prices and not consumer prices.