DNWR

The Fed Is More Out of It Than You Thought It Was by Mike Konczal

The Fed's Real Mistake in 2007: Forgetting About Aggregate Demand by Yglesias

Under "normal" conditions, one stabilizing element of the Fed is that people think they know how the Fed will respond to future contingencies. We all know that if core inflation gets up to 3 percent for a couple of quarters in a row, the Fed will respond with tighter money. That means nobody expects that to happen. And the expectation that it won't happen helps prevent it from happening. Everyone's plans are coordinated around a no-high-inflation scenario. And for a long time, that also operated on the downside. But the Fed didn't articulate in advance any clear ideas about the zero bound to reassure people. People knew Ben Bernanke had written some old papers about this. But he wasn't publicly speaking about strategies, and we can see in the transcripts that he wasn't privately trying to build consensus either. It was a failure of contingency planning that exacerbated the problems when the bad contingency arose.

If downward nominal wage rigidity hadn't occurred to extent it did - which surprised Yellen and Krugman - we could have had deflation seeing as how the Fed as slow to react and communicate its intentions.