Today the @federalreserve announced a major shift in policy. They will stop pre-emptive inflation targeting and no longer ex-ante raise/lower interest rates. Here is why you should care about this.

For decades, central bankers have followed (not without question) the logic of the Phillips curve, which is that there is a tradeoff between unemployment and inflation. So if the economy is hot and workers demand wages above their productivity, it causes firms to raise prices.

And price rises cause inflation. So if you raise interest rates, reducing firm's ability to borrow and thus spend, it'll lower their demand for workers, lower wage growth and "cool" the economy. And vice versa.

This was all nice and gung ho till the 70s, when the Phillips curve broke down- the US had both high unemployment and high inflation. tl:dr on that one was that 1. money supply (and therefore Fed action) matters and 2. "expectations" matter as much as actual inflation

In part as a response and in reaction to general evolution on macro thinking, central banks started to set explicit targets. And that's where the Fed's expectation setting ultimately came from- made most formal post Great Recession when in 2012 they set a 2% inflation target

But the post recession developed world has had persistently low inflation and interest rate changes seem to have had little impact. And one concern from the last recession is that being too enthusiastic to pre-emptively raise interest rates slowed down then nascent job growth.

So here we are. The fed is effectively putting job growth ahead of inflation. And basically declaring that they won't be raising interest rates anytime soon. Lots of thoughts on target setting and monetary policy effectiveness, but will save that rabbit hole for another time.

Why this should matter to you (did I say that was the point of this thread?)- two things. 1. Stock markets are gonna keep gettin lit because investors don't know where else to get returns. But the fundamentals behind the growth are a different question.

2 (and this is more speculative): monetary policy action relies on credibility and target setting has been a way central banks have gained and maintained credibility.

In a world without explicit targets and increasing politicization of Fed appointees, it's worth being concerned about the credibility of the central bank. Not today, not tomorrow, but it can quickly come under doubt.