Randomly Noted

At the late September meeting of the Federal Reserve’s rate-setting policymakers, a couple of pillars of central bank faith seemed to have at least been questioned by the gathered officials.

Or so imply the minutes of that meeting, released earlier this week.

Let’s start with the concept of slack. Slack, in simplistic terms, is unused human, material and industrial capacity in an economy. In a downturn such as the one we struggled through and may be emerging from, idled capacity is an unwelcome reality. People are out of work and production goes quiet.

Perhaps the only saving grace of slack is its widely assumed to be an inflation antidote. Out of work people mean less upward pressure on wages. Less than full capacity mean no inflationary bottlenecks that drive up the costs of materials.

But at the Sept. 22-23 meeting, “some participants” questioned the value and reality of slack. Those participants, the minutes say, “were skeptical of the usefulness of measures of resource utilization in gauging inflation pressures, partly because of the difficulty of measuring slack, especially in real time.”

The other pillar of stability questioned is a psychological, rather than numerical measure: inflation expectations. Since the days of Paul Volcker, whose Fed helped tame inflation with aggressive monetarism, the so-called mooring of the public’s and the market’s long-term inflation expectations has been key to Fed success.

Again phrased too simply, people have to believe the Fed will keep inflation in check over the long term to induce them to avoid the practices that in themselves encourage inflation.

There’s no doubt that those expectations had to be put at some risk by the extraordinary measures, including ballooning its balance sheet, that the Fed had to undertake to help rescue the economy during the worst of the credit crisis.

It’s good that the Fed knows it is out on a limb. “All participants recognized that inflation expectations are a key determinant of inflation, and that various measures of inflation expectations, although imperfect, needed to be carefully monitored in the current environment.”

Then the Federal Open Market Committee members talked about talking. “All agreed on the importance of the Federal Reserve continuing to communicate that it has the tools and willingness to begin withdrawing monetary policy accommodation at the appropriate time and pace to prevent any persistent increase in inflation.”

Indeed, Fed policymakers have spread that word and those words will for a while likely keep inflation expectations in check. At some point, something more than words will be needed.