The Fed just announced a major shift in its approach to inflation, and the move is not getting nearly the attention that it deserves. That is, of course, unless you don’t mind inflation moving higher than any other time in recent memory.
Writing for ThinkAdvisor, Tim Duy, senior director of the Oregon Economic Forum at the University of Oregon, explains the potential for the upcoming shift:
Having learned a hard lesson in the last recovery — don’t tighten monetary policy too early — the central bank is leaning in the opposite direction. In practice, that means the Fed will not just emphasize actual inflation over forecasted inflation, but will also attempt to push the inflation rate above its 2% target. It’s a whole new ballgame.
Thanks to the pandemic, the “official” rate of inflation has cooled off a bit this year. But now, it appears the Fed’s own Governor Lael Brainard sees inflation as unbalanced, with the only solution being to offset that imbalance and focus.
Here’s how the Fed is setting the stage for rising inflation again…
Brainard made this fairly clear in recent commentary captured on Robert Wenzel’s Economic Policy Journal:
Brainard pointed out that “research suggests that refraining from liftoff until inflation reaches 2% could lead to some modest temporary overshooting, which would help offset the previous underperformance.”
Wenzel provided an analogy to illustrate the situation, writing: “This type of goose-inflation policy action is the equivalent of the early 20th-century medical practice of prescribing smoking to treat asthma.”
You can see the official CPI inflation for the U.S. illustrated below, before much (if any) change in Fed policy has taken place:
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