Has the Fed lost credibility, as some people have argued (eg, EJ Antoni)?
Another way to test credibility is to see if people’s inflation expectations over the medium term (3 years) are moving closer to target. With a PCE y/y inflation target of 2%, this means a CPI target of 2.45%. Using this, along with the NY Fed survey of consumers (not economists), we get the following picture:
Figure 1: The Bordo-Siklos (2015) reliability estimate uses the 2.45% target (blue), the expected squared deviation from the 2.45% target (green), the 75th percentile deviation from the 2.45% target (red). The NBER has defined recession days as shaded in gray. Source: NY Fed, NBER, and author’s calculations.
My answer: No. At the very least, the Fed’s credibility regarding medium-term inflation is as high as — if not higher than — it was at the end of the Trump administration.
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