December 15, 2015


How the Fed's Strategy Is Inconsistent With Its Inflation Target (ANDREW T. LEVIN, 12/14/15, WSJ)

Since 2012, inflation has fallen persistently short of that target and is running at rates close to zero. Nonetheless, policymakers have been reassured by fairly stable survey readings on the inflation expectations of households and businesses, suggesting that the persistent shortfalls in actual inflation had not undermined the credibility of the Fed's target. More recently, however, many surveys have exhibited substantial downward drift in longer-term inflation expectations, indicating that the Fed's credibility is at stake.

For example, the chart above shows the recent downturn in the inflation expectations of professional forecasters, using the results of quarterly surveys by the Federal Reserve Bank of Philadelphia. In 2013 and 2014, the median forecast for the five-year average inflation rate, as measured by the price index for personal consumption expenditures, was very close to the Fed's target. But over the past several quarters that median has declined notably. It currently stands at 1.7%. The interquartile range indicates that the vast majority of forecasters now expect the average inflation rate over the next five years to fall significantly short of 2%. In effect, forecasters seem to be reinterpreting the Fed's monetary policy strategy as aimed at keeping inflation below a 2% ceiling rather than bringing inflation back to a 2% target.

Posted by at December 15, 2015 6:39 PM


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