Creating an environment of stagflation, reminiscent of the 1970s, will not help businesses, the unemployed, or the consumer. It is an outcome we must carefully guard against. We also need to ensure that Fed policy remains credible. Economic theory and historical experience tell us that a central bank’s ability to maintain price stability and promote economic growth hinges on its credibility.
Actions that undermine credibility can put at risk the effectiveness of a central bank’s ability to achieve its objectives. In my view, the actions taken in August and September risk undermining the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery. It is my assessment that they will not.