IN ADVANCE of the publication of their much anticipated book "House of Debt" in May, economists Atif Mian and Amir Sufi have begun blogging. The work they have done on debt and recovery over the past few years has been hugely important and influential, and their blog has quickly become a must-read. So it is a little unfair that my first mention of it here is to pick at one of their recent posts.

The authors post a nice image of inflation falling ever farther behind a 2% trend from 2000, and they write:

The Federal Reserve directly controls the short-term interest rate. But what it really tries to target is inflation and its expectations. The Fed’s goal is to achieve the target of 2% inflation in the long-term, and its preferred price index is the core personal consumption expenditure price index that excludes the volatile food and energy sectors (or core PCE for short). So how has the Fed performed in achieving its target of 2% inflation in the past 15 years? The chart above plots the implied core PCE index if inflation had met its 2% target (red line), and the actual core PCE index (blue line) starting from 1999. The blue line is consistently below the red line, the gap has only diverged further since the Great Recession. The cumulative effect is that today the price level is 4.7% below what it should have been had the Fed achieved its long-run target... What we are witnessing is the limit of what monetary policy alone can do. Sometimes there is a tendency to assume that the Fed can “target” any inflation rate it wishes, or that it can target the overall price level – the so-called nominal GDP targeting. The evidence suggests that the Fed may not be so omnipotent.

Unfortunately, I think they've got this wrong in a few ways. First, the Fed doesn't target core inflation. It targets headline inflation, but it uses core as an indicator because past core inflation is a better predictor of future headline inflation than past headline inflation. So here's something interesting: take a look at what happens when you track headline inflation (as measured by the price index for personal consumption expenditures) since 2000.

Finally everything is clear: the Great Recession was a necessity engineered by the Fed in order to disinflate back to the 2% trend. I'm kidding, of course. In fact, this is the wrong period to consider entirely, because the Fed didn't adopt an official inflation target until January of 2012. The period since then does include a meaningful cumulative shortfall:

Mssrs Mian and Sufi reckon that an inflation shortfall implies that monetary policy is no longer capable of hitting a particular price level or inflation rate. Or rather, they reckon that the combination of an inflation shortfall with an employment shortfall implies monetary impotency. One might imagine a situation in which the central bank accepts too little inflation because hiring is roaring along at the maximum sustainable pace. That's obviously not the case now, leaving one to conclude that since a sensible Fed would obviously prefer more inflation and more employment growth, the Fed is clearly unable to do more. Only, there is another possibility. Remember Jeremy Stein?

[S]hould financial stability concerns, in principle, influence monetary policy decisions? To be specific, are there cases in which one might tolerate a larger forecast shortfall of the path of the unemployment rate from its full-employment level than one would otherwise, because of a concern that a more accommodative policy might entail a heightened risk of some sort of adverse financial market outcome? This question is about theory, not empirical magnitudes, and, in my view, the theoretical answer is a clear "yes."

Ok, so we have clear evidence that there is another possible interpretation of the available evidence, namely, that the Fed has been missing on inflation and unemployment intentionally, because it is worried that more accommodative monetary policy would lead to unacceptably high financial stability risks. What about evidence for the notion that the Fed could lift inflation if it wanted to? It is worth having a look at what breakevens suggest about the evolution of 5-year inflation expectations: