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Tim Duy: Fed is considering letting inflation run
What the heck else has it been doing for years now?
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The Fed Is Setting the Stage for a Major Policy Change
By Tim Duy
Bloomberg News
Friday, July 17, 2020
For the Federal Reserve, this time really is different. Having learned a hard lesson in the last recovery -- don't tighten monetary policy too early -- the central bank is leaning in the opposite direction.
In practice, that means the Fed will not just emphasize actual inflation over forecasted inflation, but will also attempt to push the inflate rate above its 2% target.
It's a whole new ballgame.
... Dispatch continues below ...
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The Fed's traditional Phillips curve approach to forecasting inflation, which relies on the theory that inflation accelerates as unemployment falls, was widely criticized during the most recent economic recovery. Inflation remained quiescent in the wake of the Great Financial Crisis even as the unemployment rate fell to 3.5%, well below the 2012 high estimate of the natural rate, or 5.6%.
The Fed's commitment to Phillips curve-based inflation forecasts induced it to raise interest rates too early in the cycle and continue to boost rates into late 2018 even as faltering markets signaled the hikes had gone too far. The Fed was eventually forced to lower rates 75 basis points in 2019 to put a floor under the economy. Inflation remained stubbornly below the Fed's 2% target throughout that period. ...
... For the remainder of the commentary:
https://www.bloomberg.com/opinion/articles/2020-07-17/the-fed-is-setting...
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