The Federal Reserve will soon reveal a subtle yet profound shift in how it conducts monetary policy for the world’s largest economy, officially embracing a more relaxed view on inflation.
In addition to helping rescue the U.S. economy amid the coronavirus pandemic, Fed Chair Jerome Powell and colleagues also spent 2020 finishing up the central bank’s first-ever review of how it pursues the goals of maximum employment and price stability set for it by Congress. It’s a process that began in early 2019 and included a nationwide listening tour.
Now they’re close to presenting the results -- perhaps as soon as September.
“It will signal clearly to the market that not only will the Fed tolerate inflation temporarily above 2%, but that it favors it, and will try to aim in that direction,” said Mickey Levy, chief economist for the U.S. and Asia at Berenberg Capital Markets.
Several other economists interviewed made precisely the same prediction and agreed that many Fed officials have already been pursuing that strategy for months. Investors also see it coming.
The 10-year breakeven rate, a market-based gauge for expected annual inflation over the next decade, has rebounded to 1.66% from as low as 0.47% in March.
“Rising inflation expectations are, in part, indicative of the market beginning to price in the Fed’s shift,” said Bill Merz, senior portfolio strategist and head of fixed-income research at U.S. Bank Wealth Management in Minneapolis.
More details on when and how the Fed will wrap up its review may be revealed this week when the central bank releases minutes to the July 28-29 meeting of the Federal Open Market Committee.
The shift in how the Fed seeks to control inflation may sound meager, but it’s meaningful.
The Fed first pronounced a 2% target for inflation in 2012, and officials took that to mean they would always shoot for 2%, no matter how much or for how long they missed. Bygones, they said, would be bygones.