Daily Outlook

The Fed is expected to ramping up inflation soon

Recent statements from Fed officials and analysis from market veterans and economists point to a move to “average inflation” targeting in which inflation above the central bank’s usual 2% target would be tolerated and even desired.

To achieve that goal, officials would pledge not to raise interest rates until both the inflation and employment targets are hit. With inflation now closer to 1% and the jobless rate higher than it’s been since the Great Depression, the likelihood is that the Fed could need years to hit its targets.

One implication is that the Fed would be slower to tighten policy when it sees inflation rising. Powell and his colleagues came under fire in 2018 when they enacted a series of rate increases that eventually had to be rolled back. The Fed’s benchmark overnight lending rate is now targeted near zero, where it moved in the early days of the pandemic.

The Fed and other global central banks have been trying to gin up inflation for years under the reasoning that a low level of price appreciation is healthy for a growing economy. They also worry that low inflation is a problem that feeds on itself, keeping interest rates low and giving policymakers little wiggle room to ease policy during downturns.

In the latest shot at getting inflation going, the Fed would commit to enhanced “forward guidance,” or a commitment not to raise rates until its benchmarks are hit and, in the case of inflation, perhaps exceeded.

The Fed is expected to make a major commitment to ramping up inflation soon, CNBC, Aug 5

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