Powell said that The Fed will allow inflation to run hot, hot, hot and unemployment to run lower than previously tolerated.
(Bloomberg) — The Federal Reserve’s new plan to run the economy hot looks easier said than done as the central bank confronts multiple forces holding down inflation.
“The Fed needs to articulate very clearly how they plan to achieve the new objective,” Aneta Markowska, chief economist at Jefferies, wrote in a report to clients. “Otherwise, these are just words on paper that don’t really mean anything.”
Chair Jerome Powell Thursday outlined a new approach to setting U.S. monetary policy. The Fed, he said, will sometimes allow inflation to run above the 2% target to make up for prior undershoots, and allow unemployment to run lower than officials had previously tolerated.
The move confirmed to investors that the Fed is likely keep interest rates near zero for years to come as it seeks to decisively achieve its inflation goal, adopted in 2012. Inflation has averaged only 1.4% since then amid headwinds affecting the U.S. and other major economies, including weak productivity growth, globalization, aging populations and technological change.
Fed policy makers meet again Sept. 15-16 when they’ll have a chance to spell out how the new strategy will shape their policies aimed at pulling the U.S. economy out of its worst downturn since the Great Depression.
Economists at Deutsche Bank AG said officials may clarify their guidance on the path of rates by linking future hikes to reaching certain thresholds for inflation and employment. Minutes of their July meeting showed they’d debated this approach.
The problem is … The Fed hasn’t been able to generate much of any inflation. Core PCE growth YoY is a miserly 1.25% inferring a Taylor Rule Fed Funds rate of -5.12%.
The USD I25 FORWARD RATE 5Y5Y is 1.2049%.