How to Improve Inflation Targets Without Inciting the Bond Vigilantes
Central banks need to upgrade their monetary policy mechanisms without frightening the market horses.
Can policymakers adjust their inflation targets without getting shot by the bond vigilantes?
Photograph: Hulton Archive/Getty Images
How might policymakers alter their 2% inflation targets without getting attacked by the bond vigilantes for playing fast and loose with their mandates? The post-pandemic experience of soaring consumer prices demands a review of how central banks conduct themselves; policymakers should bite the monetary bullet by asking their political masters to allow them to adopt individual inflation bands, and fend off potential critics by adding an obligation to embrace some broad growth measure that embraces the wider economy in guiding interest rates to an appropriate level.
As I've argued before, attempting to steer multitrillion-dollar economies to land with laser precision onto a micro-specific inflation pin is a fool’s errand. The aura of invincibility and omnipotence has cracked; central banks should be voluntarily seeking reforms, or they will be reformed in ways that may prove less than ideal. The current omerta surrounding the topic is unsustainable, especially when politicians are starting to question the independence of their central banks.