Credible Discretion

Brad DeLong writes:

I think, the most interesting thing about the late-Greenspan Fed. He has so much credibility as an inflation hawk that he simply doesn’t have to worry about what monetary policy moves over a one or two-year span do to alter people’s perceptions of the Fed’s tolerance for inflation. As a result, he can be much more aggressive in trying to keep unemployment near its natural rate (whatever that is) than a central banker who would wish to and is known to wish that he could focus on stabilizing employment rather than controlling inflation. Such a central banker has to be constantly reassuring everyone that he is committed to controlling inflation, and so has very little room to respond to shocks–like shocks to oil prices–that might affect both.

Quite right. In short, it’s not rules versus discretion it’s rules and discretion.