- The Fed recently revised its monetary policy strategy, replacing 2% price inflation targeting, adopted in 2012, with a new approach in which the Fed targets an average inflation rate instead.
- The reaction to the new policy was mixed. We see adverse comments as misguided and not attuned to recent economic developments in the US and around the world.
- It's been decades since we saw inflation stay above 2% for long. To assume that the “punch bowl” would be taken away soon on an overheating (economic) party is laughable.
- The fear of traditionalists is that if inflation trends upward, delaying palliative measure for so long would risk inflation expectations unmoored and sets off an uncontrollable inflationary spiral. This argument appeals to what happened in the 1970s.
- The Fed, to put it mildly, is desperate to see some sustained inflation, doing whatever it does in an economic system. We therefore expect steepening yield curves, higher interest rates and bond yields in the intermediate future as consequence of this new Fed policy.
For further details see:
The Fed's New, Looser Policy On Inflation: It Will Steepen The Yield Curves, With The Back End Rising The Most