Fed: Symmetrical inflation target - AmpGFX

In the FOMC minutes and the statement presented on 15 March, the Fed emphasized that its 2% inflation target is symmetrical, not a ceiling as noted by Greg Gibbs, Director at Amplifying Global FX Capital.

Key Quotes

“The minutes said, “A few members expressed the view that the Committee should avoid policy actions or communications that might be interpreted as suggesting that the Committee’s 2 percent inflation objective was actually a ceiling. Several members observed that an explicit recognition in the statement that the Committee’s inflation goal was symmetric could help support inflation expectations at a level consistent with that goal, and it was noted that a symmetric inflation objective implied that the Committee would adjust the stance of monetary policy in response to inflation that was either persistently above or persistently below 2 percent.”

“In its 15 March policy statement, the Fed said, “The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.”

“The symmetrical nature of the 2% target was already well known, but by pointing it out, it suggests some FOMC members might quite like to run inflation above the target for a while since inflation has been below target for some time (over 4-years).  They would argue this would help lift and anchor inflation expectations at a higher level more consistent with sustaining inflation around 2%.”

“However, the mere fact that the FOMC needs to point this out at all should also remind the market that the inflation is close to target already.  Headline is in fact recently above target (PCE deflator 2.1%y/y in Feb), and core (excluding food and energy) was 1.75%.  The Dallas Fed trimmed mean PCE was at 1.9%y/y, a fact noted in the minutes.”

“One factor that keeps the Fed from lifting its inflation outlook is that it believes there is residual seasonality in the inflation data that may tend to lift inflation early in the year, from which it may settle back down later in the year.  The FOMC also mentioned this in their minutes.”