What did the Fed signal about inflation?

In the words of Cardiff Garcia:

She [Yellen] doesn’t think inflation will threaten to breach the 2 per cent level so long as unemployment is “quite high”.

This could be read either hawkishly or dovishly.

The potentially hawkish interpretation is described by Tim Duy, who notes that such language reinforces the implicit, extant policy of 2 per cent as an inflation ceiling rather than a target.

The dovish reading is that if she doesn’t think this tradeoff is likely to be an issue, then it’s because she also thinks there is more labour slack than the unemployment rate is communicating — and therefore it’s unlikely that inflation will climb to its target even as the labour market improves.

But Narayana Kocherlakota didn´t like any of that because, according to him:

Mr. Kocherlakota emphasized that he thought the Fed needed to be aggressive in signaling to the public that it won’t tolerate inflation running below its 2% objective for a long time. The Fed’s preferred measure of inflation is now closer to 1%.

“We’re targeting 2%. We should be taking purposeful steps—that we’re describing clearly and articulating—to address that issue,” he said.

The Fed has a precise numerical inflation target- 2% – but feels a “winner” if inflation is persistently below!

Update: Jim Pethokoukis has reproduced an “award winning” comment by Robert Brusca, the last part of which reads:

The Fed continues to see lower rates of unemployment than it was projecting in the past. But the Fed’s own projections of growth are being trimmed. How does the unemployment rate make this accelerated progress? It’s all due to the magic of demographics. The Fed is relying on a continuation of a process it really does not understand and did not anticipate. It is willing to PLAN to raise rates on the notion that this process will continue. Who says the Fed ain’t got religion?

The Fed has not told you using its fabled transparency that this is the process by which unemployment rates will drop faster. Janet Yellen registers deep concern about all sorts of labor market characteristics but she is stopping QE which is the one thing the Fed was doing that might have helped. Moreover, the Fed is planning to raise the fed funds rate with inflation below target and expected to remain below target. Fed policy amounts to hoping that demographics will reduce the rate of unemployment faster. … While Janet urges you to ignore ‘the Dots’ I urge you to shred the Fed statement and to look only at ‘the Dots’ and the other projection materials. They describe the lay of the land and conditions where the Fed really plans to live. The statement is a cover story.

2 thoughts on “What did the Fed signal about inflation?

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