Economists are trying to figure out why the Fed hasn't generated higher inflation. According to Gavin Davies, "In most countries, headline CPI inflation has been falling significantly since the end of 2011, and it has now dropped to less than 1 per cent in both the US and the euro area." Here's a graph of inflation in the US and UK from Davis:
For people who might wonder why the Fed would want higher inflation, the answer is that price inflation reduces real wages, which should encourage employers to hire more and reduce unemployment. Inflation also is supposed to discourage savings and make people give up their long term goals and just spend like drunken sailors.
For mainstream economists, and as a result for the Fed, even mild deflation is the equivalent of a zombie apocalypse. They think they can stop inflation any time they want, but deflation is a monster that can't be slain. Once in a deflationary death spiral another Great Depression or worse becomes inevitable. So Fed watchers want the bank to try harder to generate inflation. There is a logical problem with that attitude. George Selgin wrote on his blog Free Banking :
Once, while a good friend was visiting me on a particularly cold winter's night, the temperature in the poorly insulated living room of my old Victorian house dropped to a distinctly chilly 62 degrees. "Can't you make it any warmer?" she asked? "I'm afraid I can't," I said; "the thermostat's already on 68." "Try setting it at 80," she replied. I didn't indulge her (well, not that way). But I wonder whether those economists who have been calling for a higher inflation target would have.
In other words, Selgin is saying that the Fed is trying but can't do the job. David Henderson responded to Selgin at EconLog and posted this comment by Jeff Hummel:
You raised a good question: if the Fed really wants 2 percent inflation, why aren't they achieving it? After all, central banks traditionally could deliver any long-run rate of inflation they wanted as long as they had the will to do so. But I think that George and Jerry are right; 2 percent is their actual goal. So what explains the failure of technique? My answer would be Fed targeting of interest rates, yet again. As long as interest rates are really low (for reasons other than monetary policy), they think their policy is very loose and just not yet working. Couple that with the fact that paying interest on reserves and other policies designed to allocate credit are offsetting their expansion of the monetary base.