Global Daily – Will the Fed allow an inflation overshoot?

by: Maritza Cabezas

In this publication: US inflation measures show modest signs of inflation pressure. Fed officials have suggested the central bank could allow a brief overshoot in US inflation to reach 2% target. This would require the Fed to remain accommodative for a while.

 

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US inflation measures show modest signs of inflation pressure

There are very few signs that inflation pressures are building up. A report released on Tuesday, from the National Federation of Independent Business (NFIB), suggests that small businesses see very little on the way of price inflation in the coming time. And while we expect a modest pickup in wage inflation, we think that modest GDP growth and subdued inflation abroad will cap the upward pressure on prices. Meanwhile market-based inflation expectations have been trending up moderately lately, influenced mainly by the higher oil prices, while longer-run inflation expectations reported by the University of Michigan Survey of Consumers has been drifting down. Core PCE, the preferred inflation measure for the Fed, increased by 1.7% yoy in March, after hovering around 1.3% for almost a year.

12 May

 

FOMC members talk about allowing a brief overshoot in US inflation to reach 2% target

Over the last few days, the more dovish FOMC officials have been floating the idea that the Fed could allow inflation to overshoot. Federal Reserve Bank of Chicago President Evans said in an intervention in London that the Federal Reserve should consider allowing inflation to temporarily rise above the 2% target. The argument is that a too prolonged spell of low inflation entails larger risks, while a brief overshoot may help anchor inflation expectations close to the 2% goal. Other members, including the Chair of the Fed and Fed Governor Lael Brainard, have signalled in separate interventions made in the past few months the risks to the inflation outlook and the need to anchor inflation expectations. They have suggested that if inflation expectations derail, this could require a more accommodative stance of monetary policy than would otherwise be appropriate. We think that headline inflation will return to the 2% target, but that it will require the Fed to remain accommodative, supporting our view of no rate hikes this year.