Why the Fed’s Rethinking Its Toolkit (It’s Broken)

The world’s central bankers have a confession to make: They’re not sure whether the tools they’ve been using for decades work anymore. That uncertainty has become increasingly clear since the dramatic U-turn by the U.S. Federal Reserve in January, when it set aside plans to continue with a steady ratcheting up of interest rates. The persistence of economic fragility and stubbornly slow price increases, sometimes called lowflation, has central bankers wondering if they need a new toolbox — or a new compass.

Here’s what’s puzzling the Fed and its counterparts: Since the 2008 financial crisis, policy makers have flooded economies with cheap money. As expected, that helped pull the world back from the brink of a global depression. It should also have produced robust growth and faster inflation – but it didn’t. To help it understand this new world better, the Fed has embarked on a year-long, wide-ranging review of its strategies, tools and communications practices.