Unlike most of the major central banks around the world, including the ECB, the Bank of England, and the Riksbank, the Federal Reserve has not clearly announced and committed itself to an inflation target. Some form of inflation targeting is widely accepted as a best practice by the majority of central bankers and monetary economists around the globe.
Given the extraordinary amount of liquidity present in the U.S. banking system, it is reasonable for the public to be concerned about the prospects for inflation down the road. If the public’s expectation of inflation continues to drift upward, whether it is caused by higher commodity prices, concerns over fiscal deficits, or the Fed’s large balance sheet, we could find our credibility under pressure.