Thread by @VMRConstancio

Analysts and even some FED members have belittled the recent framework change as just a form of target symmetry or temporarily accepting inflation above target. However, the decision was to go for Averaging Inflation Targeting (AIT), which is different /1 ft.com/content/d2fd2c…

AIT strategy is a commitment to take measures to increase inflation above the average target (e.g.2%) if actual inflation had been below it for several years. So, it should commit the FED to decide now on corresponding policy changes. Will it happen this week? /2

What could change? Since March 23, the QE policy is already to purchase “in the amounts needed to support smooth market functioning and effective transmission of monetary policy,”, i.e.,” whatever is necessary” or “unlimited”. No need to announce new numbers to use it. /3

The other possibilities are a rate cut (that seems unlikely), yield curve control (abandoned with AIT), or changing forward guidance to make it more expansionary and concrete. There are many ways to do this, but indexation to some variable is risky and improbable. 4/4

So, the FED used forward guidance as the only measure really available to act on the new framework. Didn´t take new expansionary measures now to get inflation up but only a conditional time extension of the policy in place. It is though a bet on increasing inflation expectations

Yesterday´s FED decisions implied that the new monetary framework is not really AveragingInflation Targeting or that it´s a vague and mild version of it. Markets were not impressed: stocks and commodities down, yields down and the dollar slightly up and not down etc..