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The Fed framework gives rise to a mixture of views, strategies of average


Aug 12 (Reuters) – The Federal Reserve’s new approach to monetary policy, intended to provide a clear path for the central bank to meet its inflation target, has so far led to a range of conflicting interpretations as officials may be turning earlier than expected to a debate about when to raise interest rates.

The move seemed a long way off last December when the Fed presented what appeared to be a clear test of when its inflation target would be met and that it would be appropriate for rates to rise close to zero.

But this year’s jump in inflation has some officials already saying the new benchmarks have been met, others saying the target remains far away, and others shrugging their shoulders at the remaining level of uncertainty. around the reopening of the pandemic.

It’s a division some analysts anticipated when the Fed adopted a new framework focused on average inflation over time, with periods of higher prices offsetting lower prices, but did not define key concepts. such as the length of the averaging period or the level of violation. tolerate. This will now need to be sorted out as the data arrives and officials promote competing forecasts for inflation and competing narratives for the appropriate policy response.

It is almost a given that in the coming months, the central bank will start cutting its emergency pandemic support by slashing its $ 120 billion in monthly bond purchases. What is far less certain is the timing and pace of any subsequent increase in interest rates, a more substantial step which will depend on which view of inflation prevails.

“I thought it would be the flat Phillips curve that would be the problem,” Chicago Fed Chairman Charles Evans said this week, referring to the momentum that has kept inflation low over the past decade.

Instead, inflation has not just exceeded its 2% target, but has exceeded it so far that a debate has erupted over whether the Fed may have already hit the targets. of its new frame.

In the Fed’s policy statement, this translated into a promise to keep rates low until “inflation hits 2% and is on track to moderately exceed 2% for a while.”

A favorite Fed inflation measure, the non-food and energy personal consumption expenditure price index, is currently up 3.5% year-over-year, and three regional bank officials have said last week that might be enough to meet the standard.

“It’s a pretty big boost and it’s enough to have caught up with some of the past downside failures that were at the heart of the discussion” when designing the new framework, the Fed chairman said last week. of Saint-Louis, James Bullard. . “In my mind, we should declare success on this point.”

Atlanta Fed Chairman Raphael Bostic made a similar point this week – inflation this year will bring a multi-year average up to 2% – and suggested officials should start debating the practical significance of their new language on inflation.

Kansas City Fed President Esther George said on Wednesday that “one could argue” that the inflation seen today is enough to “line up” with the threshold declared to raise rates.


The distinct objective of maximum jobs is also the subject of debate, with its own nuances and disagreements on the proximity of the economy to achieving it.

But the discussion of inflation is particularly complex, and it came quickly. As Evans noted, officials expected them to fight to push up inflation and were prepared to leave politics loose for a long time to do so – while allowing job gains in s ‘accumulate and push the boundaries of “maximum employment” in a way that benefits workers.

Instead, the unexpected shocks of the reopening – labor shortages, global supply issues, demand exceeding the economy’s capacity to produce goods and services – have eroded confidence that inflation will remain forever contained.

Richmond Fed Chairman Thomas Barkin said this week that his baseline scenario remains that inflation has “set” and is expected to slow next year. But he acknowledges that this has persisted longer than expected, and he’s open to both possibilities – lower inflation next year, or subsequent shocks that keep prices higher. The Fed must be ready for one or the other outcome.

Barkin put together a list of key unknowns that could shape the outcome.

“Is this Delta variant going to upset the business or is it going to turn into the flu? Is it going to impact labor availability and all of a sudden we will not have our fall recovery but we will have really tight labor markets for several months? … What will our relationship be with China in six or nine months? ” he said.

Evans anchored what last December had been the near consensus view that inflation would rise a bit, help the Fed push long-term inflation toward its target, but not threaten a full-scale epidemic that would force a reaction.

This week he said he still thinks low inflation is the biggest risk over time and said he would regret the Fed reacting to the current price hike only to hamper the growth of the country. job that the economy sorely needs.

But he admitted that the discussion has become more complex.

“There is no embedding the pain” of the price increases, Evans said. “Rather, the question is what the outlook for inflation will be in 2022 and 2023. Some of those prices will change.”

Reporting by Howard Schneider; Editing by Dan Burns and Nick Zieminski

Our Standards: Thomson Reuters Trust Principles.

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