The Four Tests to Assess Inflationary Risks

The Federal Reserve got itself into trouble by adopting its flexible average inflation targeting regime in, I guess, sort of late summer 2020. The problem with that was that it required a pre-commitment not to raise interest rates in the event that inflation would move above target. And then what happens is that inflation does pick up, but you don't respond to it because bond yields are still very low. So effectively, QE, I think, distorted the behavior of government bond markets in a way that meant that central banks lost some of the information they would previously have relied on.

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