Central Banks


The Federal Reserve rolls out average inflation targeting

  • Fed will target average inflation and put emphasis on ‘broad and inclusive’ employment
  • Shift motivated by underlying changes to the economy including lower potential growth and persistently lower interest rates and low inflation
  • Fed likely to be constrained by its effective lower bound more frequently than in past
  • Fed not tying itself to any particular method to define ‘average’ inflation
  • Says Fed will “not hesitate to act’ if inflation rises ‘above levels consistent with our goal’
  • Full statement
  • New statement on longer-run goals and monetary policy strategy

There are news headlines highlighting a shift to placing employment ahead of inflation. That would be as big — if not bigger — than average inflation targeting; however I don’t see that in the text of the release so be careful.

The main takeaway new doctrine is that “following periods when inflation has been running persistently below 2
percent, appropriate monetary policy will likely aim to achieve
inflation moderately above 2 percent for some time.”

We don’t know what ‘moderately’ means or ‘some time’ and the Fed is giving itself to interpret it as it feels. That’s adding some dangerous uncertainty. I don’t understand how 10-year yields are only at 0.655%. Obviously that’s underpinned by Fed buying but the Fed is going all-in here.

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