One simple clause from the Fed today but it’s a big deal: “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”
Why does that matter? Well, the Fed directly influences short term interest rates.
But big investment decisions are more about long-term rates. But you can think of long-term rates as a series of predictions about what short-term rates will look like over the long term.
But big investment decisions are more about long-term rates. But you can think of long-term rates as a series of predictions about what short-term rates will look like over the long term.
So in the current setup, you could have low rates now but also the expectation that as soon as the economy reaches a non-crisis point the Fed will raise rates.
The new framework says no, we’ll keep them lower for longer.
The new framework says no, we’ll keep them lower for longer.
That should help boost the economy now. Not because inflation is good, but because the claim that Future Fed will be tolerant of inflation makes it more attractive to invest now.
The downside is that for it to work you do have to go through with it.
The downside is that for it to work you do have to go through with it.
Had this framework been in place I believe we’d have had a stronger labor market recovery but also a period at the end where inflation rose to 3-4 points and stayed there for a while.
A small price to lay in my view.
A small price to lay in my view.
My take for the next review is that the whole “inflation is good sometimes” discourse is confusing and problematic.
What you want to say is you are targeting nominal income growth or nominal wage growth and any impacts on inflation are epiphenomenal.
What you want to say is you are targeting nominal income growth or nominal wage growth and any impacts on inflation are epiphenomenal.
