This is the Kator Daily Podcast for Thursday, September 3rd, 2020.

I'm Caleb Brown.

What does the Federal Reserve's announcement about how it's going to handle inflation

mean for the real economy going forward.

George Selgin directs the Cato Institute's center for monetary and financial alternatives.

We talked about this Fed move and its implications last week.

Right, so the announcement is... this Fed move and its implications last week.

Right, so the announcement is that the Fed is going to be more tolerant of occasions

when the inflation rate goes above its long run target of 2%.

This is a policy they call average inflation targeting.

The idea is that over the very long run nothing changes the average rate of

inflation will still be 2% if all goes well of course but there will be more occasions when the inflation rate is allowed to go above 2%.

Crisis time like the present would be an example of that sort of occasion and presumably on

other occasions it'll have to be below 3% otherwise you won't have the average so

there's more willingness to tolerate fluctuations of inflation around

a long-run target with this policy. And just how that's supposed to help of course is a big question but that's

what has been announced today and what the Fed is hoping will in fact prove to be a way of having a more effective monetary policy for

combating crises.

Given the current crisis and given the potential for any number of other crises to pop up,

it seems that having a nominal interest rate as low as it is does sort of hem in this the central bank in terms of its

policy options is that really what they're trying to fix here?

Yes, it is indeed, Caleb, exactly what they're trying to fix.

...