Federal Reserve policy makers are openly voicing their willingness to accept above-target inflation even as price pressures are beginning to build.
“Let me be clear: A small and transitory overshoot of 2 percent inflation would not be a problem,” William Dudley, president of the Federal Reserve Bank of New York, said in a Jan. 11 speech. “Were it to occur, it would demonstrate that our inflation target is symmetric, and it would help keep inflation expectations well-anchored around our longer-run objective.”
If that sounds ridiculous it´s because it is!
“Even as price pressures are beginning to build”. Inflation may be stable but it is not a constant. To look at the chart and say “price pressures…” is in bad taste!
According to the Fed´s own Price Pressures indicator, for several years the probability that the 12 months ahead inflation will be below 2.5% is almost a certainty.
St. Louis Fed President James Bullard even went so far as to suggest on Jan. 10 that policy makers should consider shooting for inflation above 2 percent for an extended period to make up for its below-target performance over the past five years.
“Even if formal adoption of price level targeting is not realistic in the near term, the ideas behind it could nevertheless influence near-term policy,” he said in a Jan. 10 presentation to the CFA Society of St. Louis.
The question remains. Why should inflation climb to target (or even above it temporarily) if the Fed is acting as if inflation were a threat? Dudley, for example, thinks three rate rises this year “is not an unreasonable sort of starting point for thinking about Fed action in 2018”.
There are others, like Rosengren and Kaplan, who think four hikes may be “ideal”. On the opposite side of the spectrum, Bullard shows more consistency and thinks there should be no rate hikes this year.
The Fed is saying one thing: “let´s get inflation up to target” but acting as if it were afraid of inflation!
The point is it will be quite hard to get inflation up if nominal spending (NGDP) growth remains this low.