Fed speakers allude to a shift in their inflation targeting regime - Rabobank

Analysts at Rabobank note that yesterday saw several Fed speakers allude to a shift in their inflation targeting regime in response to yet another Face/Off – the Fed is trying to save face because inflation won’t take off.

Key Quotes

“Rosengren stated that a shift away from 2% to a range of 1.5% to 3% --which actually means a mid-point of 2.25%, which is higher than the current 2%-- would not be disruptive. Of course, he’s right. It would be downright ‘undisruptive’, as it would allow the Fed to keep juicing credit card borrowing and equity markets further without raising rates at the pace that some current (and prudent) fundamentals argue for. ‘What could be wrong with that?’ he asked sarcastically.”

“Williams also argued for a Fed shift to a price-level target. What that means is that if inflation undershoots the target level for some time (as has been the case for years now, because the Fed’s Phillips Curve model has been wrong for years), then the Fed should allow inflation to overshoot the target for years to compensate rather than rushing to raise rates once it returns to target. Again, this is an outright intellectual excuse not to raise rates aggressively. It also means a central bank can be wronger for longer, with inflation far too low, and then far too high, and still pat itself on the back for meeting some abstruse target that only makes sense to itself and a handful of monetary policy wonks. (“The operation was a complete success. Unfortunately, the patient died.”) The serious point here is that the Fed is aware that rates are still dangerously low should anything suddenly go “all 1997” or “all 2007”.”