The writer is a former central banker and professor of finance at the University of Chicago Booth School of Business

Why does the US Federal Reserve find it so difficult to convince the market that it means business when it comes to not cutting rates? The minutes of the December meeting clearly stated, “No participant anticipated that it would be appropriate to begin lowering the federal funds rate target in 2023.” However, this hawkish statement did little to change market expectations, making the Fed’s task of slowing the economy even more difficult.

Central bank statements have an impact because people still believe that institutions will do what they say. This credibility is obtained through a combination of central banks’ reputations (either dovish or hawkish), past actions, and the policy tools they possess and the frameworks under which they operate. Unfortunately, the kind of credibility needed to escape a system of very low inflation, which we had until recently, is different from the kind needed to curb high inflation, which we have now. Credibility, by its very nature, does not turn into a dime.

Traditionally, central banks have grappled with high rates of inflation. Government spending usually overestimates the economy to generate growth. Central banks helped and abetted this, not only by keeping interest rates low, but by financing government spending. In the process, they managed to stoke inflation, which hurt growth where it had taken hold. Then, perhaps learning from the Fed under Paul Volcker, countries decided it was best to have an independent technocratic central bank, mandated to keep inflation in check through an inflation targeting framework. Thus, banks gained credibility as an inflation fighter.

But after the global financial crisis, inflation dropped dramatically, making the challenge push it up again. In order to increase inflation, central banks had to develop a new kind of credibility. In the words of economist Paul Krugman, they should have “credibly promised to be irresponsible” when they saw inflation, by committing to curbing it rather than fighting it furiously.

And so central banks adopted a new set of tools. Quantitative easing, for example, whereby the bank announces that it will buy government bonds for an extended period, worked in part by requiring the bank not to raise interest rates until the announced buying program ends. In fact, this may be part of the reason why both the Federal Reserve and the European Central Bank were slow to raise interest rates when inflation picked up in late 2021. Central banks also acted in ways that undermined beliefs about their intent to raise rates, as they did when they halted rate increases. After the markets started to faint in late 2018.

Finally, central banks have changed their frameworks to include inflation tolerance within them. A key component of the Fed’s new framework, adopted in 2020, was that it would not be preemptive in avoiding inflation. The old mantra abandoned, if you’re staring at swelled eyeballs it’s already too late.

While none of this was particularly effective in raising inflation, it may have encouraged the government to spend more, knowing that the central bank would not raise interest rates quickly. When the pandemic hit, there were few restrictions on government spending that, along with the war in Ukraine, pushed us back into a system of high inflation. But central banks again find themselves with the wrong kind of credibility – that is, the assumption that they will tolerate inflation. No wonder markets continue to price in Fed cuts, even as the Fed insists it won’t become accommodative until inflation is tamed. In short, the credibility of a central bank is useful only when it is relevant to the inflationary system it faces.

Should the Fed act again to restore its credibility as an inflation hawk? It takes a long time to build credibility, and inflation regimes can change again. It is not inconceivable that an aging population, declining immigration, deglobalisation, and a slowing China could push the world back into a low-growth-inflationary environment.

However, central banks are likely to be more effective if they rebuild their commitment to combating high inflation. And if inflation gets too low, maybe we should learn to live with it. It’s hard to argue that all the frantic activity in the recent low-inflationary regime was effective, distorting credit, asset prices, and liquidity in ways that hurt us today. But as long as low inflation does not collapse into a rapid deflationary spiral, central banks should not worry excessively. Instead, they should shift the burden back to governments and the private sector when it comes to achieving sustainable growth.