I suspect Fed watchers will see this as big. It seems more like a gradual evolution to me.
There are three big changes, which I'll take in turn.
There are three big changes, which I'll take in turn.
First, the Fed promises to focus on "shortfalls of employment", rather than "deviations" is just clarifying what it always meant.
Shortfalls matter for the employment part of the dual mandate.
But deviations matter for inflation.
So it retains the right to respond to deviations
Shortfalls matter for the employment part of the dual mandate.
But deviations matter for inflation.
So it retains the right to respond to deviations
Second, acknowledging that the effective lower bound on rates will be with us for a while is simply stating the obvious.
The Fed promises to rely on "its full range of tools." But this doesn't have much force when it won't spell out which tools or how it'll use them.
The Fed promises to rely on "its full range of tools." But this doesn't have much force when it won't spell out which tools or how it'll use them.
Third, the Fed clarifies that its inflation target of 2% is meant to actually achieve average inflation of 2%. On its face, that doesn't add much. But in reality it has undershot its 2% inflation target almost since its inception, leading some to wonder if it was a ceiling.
BUT, there's a question of how to define an average. The Fed is shifting its view that inflation should average 2% in the future, to averaging 2% including the recent past and the medium-term future.
This matters, because it means that past errors shape future policy.
This matters, because it means that past errors shape future policy.
It means that a period of below-target inflation (like we've had for the entire past decade!) should lead the Fed to target somewhat above-target inflation over the next few years to make up for it.
So what this means is that the Fed has found an artful (though relatively opaque) way to raise its inflation target for the next few years.
A reasonable guess is that its new target is to push inflation up to 2.5% over the next few years.
A reasonable guess is that its new target is to push inflation up to 2.5% over the next few years.
Critique #1: Why not be more direct?
"Our inflation target is now x%" would be much clearer than a back-door redefinition of what "average inflation" means.
An inflation target works well when it's widely understood. This ain't it.
"Our inflation target is now x%" would be much clearer than a back-door redefinition of what "average inflation" means.
An inflation target works well when it's widely understood. This ain't it.
Critique #2: The case for raising the inflation target—to counter the problems posed by the effective lower bound on rates—seems sound.
But opaquely raising it by 0.5% seems like fiddling at the margins. Is a half point really aggressive enough? (It's not.)
But opaquely raising it by 0.5% seems like fiddling at the margins. Is a half point really aggressive enough? (It's not.)
Anyway, you can read the Fed's logic in Jay Powell's Jackson Hole speech, here: federalreserve.gov/newsevents/spe…
I buy the argument for flexible inflation targeting, but the Fed's strategy changes are timid, as if it hasn't convinced itself.
I buy the argument for flexible inflation targeting, but the Fed's strategy changes are timid, as if it hasn't convinced itself.
