Shutdown: How Covid Shook the World's Economy

by Adam Tooze

The previous year, the Fed had embarked on a basic review of its monetary policy framework. What was to be done about the repeated failure to meet the inflation target of 2 percent? After a year of deliberation, America’s central bank was no closer to an answer. The United States, like all the other advanced economies, had a low-inflation problem. What the Fed could do was to change the way it targeted its policy. Henceforth, rather than committing to keep inflation below 2 percent, it would seek to achieve an average inflation rate of 2 percent. If inflation slipped below that target, as it had done persistently in recent years, the Fed would aim to make up for it. If and when inflation finally did rise above 2 percent, the Fed would not preemptively seek to restrain it, but would allow the economy to “run hot.”