The future doesn’t look good for inflation targeting
If Fed doesn’t want to push the economy into recession, the central bank will probably have to abandon its 2% inflation target.
It’s not easy for me to say that. I was raised on inflation targeting. It was my monetary policy religion. Most economists of my vintage were dutifully taught that after generations of ineffective or damaging monetary policy tools, we had finally figured it out.
It sounded good in theory. But the inflation-targeting track record isn’t great. In 2012, the US adopted an inflation target of 2%. Shortly afterward inflation fell below that level and mostly stayed less than 2% until the pandemic.
The Fed’s current forecast of 2.8% this year, 2.5% next year and 2% after that is looking extremely optimistic
Historically the bond market hasn’t been a good predictor of inflation, and it’s also not pricing in the significant rate increases that would be required to get to 2%.
The 2-year bond yield is still less than 5% and the 1-year is just above 5%, and the Fed funds rate will probably have to go to at least 6% to break inflation.
There are four probable scenarios as this stage
Lowering inflation and getting the rate of inflation to 2% are two different things.
Some economists might think it’s worth causing a recession to maintain the Fed’s credibility, but Americans won’t tolerate losing their job because of some nebulous central bank policy. I can’t imagine how the Fed would explain such a policy choice to the public
Allison Schrager Bloomberg 1 mars 2023
The widely accepted idea that rates will eventually fall back to pre-pandemic levels...
Allison Schrager Bloomberg 9 februari 2023
https://englundmacro.blogspot.com/2023/02/the-widely-accepted-idea-that-rates.html
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