Why hitting a target sometimes means missing a target

March 17th, 2016 at 8:55 am

Given the Fed’s persistent record of undershooting their inflation target, I and others argue that as there’s some tentative evidence of inflation firming up a bit, hitting the target on average means overshooting for awhile. The key point is that their 2 percent target is a target, not a ceiling. Over at WaPo.

BTW, some may raise an objection to this line of reasoning that at her presser yesterday, Chair Yellen stated that the interest-rate-setting committee is “not trying to engineer an overshoot of inflation, not to compensate for past undershoots.”

But the question is not what they’re “trying to engineer” as much as what they’ll tolerate. Will they accommodate core inflation above 2% or hit the brakes hard should it hit the target? The target argument, embedded, as I show, in their long-term goals, suggests such accommodation is warranted. What they actually will do, otoh, is yet to be seen.

Sources: BLS, BEA, Fed

Sources: BLS, BEA, Fed

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One comment in reply to "Why hitting a target sometimes means missing a target"

  1. spencer says:

    Don’t forget that the y/y change in nonfarm unit labor costs is 3.0%