Maintaining the public’s confidence in its policies should thus be among the central bank’s highest priorities.14 For this reason, I would argue that the Fed’s response to the inflationary effects of an increase in oil prices should depend to some extent on the economy’s starting point.
If inflation has recently been on the low side of the desirable range, and the available evidence suggests that inflation expectations are likewise low and firmly anchored, then less urgency is required in responding to the inflation threat posed by higher oil prices. In this case, monetary policy need not tighten and could conceivably ease in the wake of an oil-price shock.