But I disagree with this argument. I’ve described how, as the economy recovers, the FOMC should respond by reducing the level of monetary accommodation. Logically, it follows that if the economy recovers more slowly than expected, then the FOMC should respond by reducing the level of monetary accommodation more slowly than expected.
The FOMC should only increase accommodation if the economy’s performance, relative to the dual mandate, actually worsens over time. To sum up: The Committee’s actions at the last two meetings are inconsistent with a systematic pursuit of its communicated objectives. It follows that these actions diminish the Committee’s credibility and so reduce the effectiveness of future Committee actions and communications.