The Fed Is Expected to Make a Major Commitment to Ramping up Inflation Soon
The comments below are an edited and abridged synopsis of an article by Jeff Cox
In the next few months, the Fed will solidify a policy outline that would commit to low rates for years as it pursues an agenda of higher inflation and a return to the full employment picture that vanished as the coronavirus pandemic hit.
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.
The policy initiatives could be announced as soon as September. Fed Chairman Jerome Powell has said that a yearlong examination of policy communication and implementation would be wrapped in the near future. The culmination of that process, which included public meetings and extensive discussions among central bank officials, is expected to be announced at or around the FOMC’s meeting.
Markets are anticipating a Fed that will adopt a more accommodative approach than it did during the Great Recession.
Up for discussion: all-in on inflation, and the market weighs in.