The Federal Reserve anticipates its easy money policies, in part, because its favorite measure of inflation has been more than half a percentage point below its target for several years.
With such low inflation for so long, they think, the Fed can keep interest rates very low for a while to help boost the economy as it recovers from the effects of the coronavirus pandemic.
This raises an important question: is the central bank thinking correctly about inflation?
The Fed sets its inflation target in terms of consumer prices, such as those we pay for cars, toothpaste, and haircuts. But in recent decades, prices have often risen much more rapidly for investment assets, such as housing and stocks, and have twice caused booms and revisions followed by recessions.
If the Fed has issues with the low interest rates it has helped design, it may be because of asset prices and not consumer prices.