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Jerome Powell’s Big Reveal: ‘Flexible Average Inflation Targeting’ Is Here

As expected, Jerome Powell used his address to this year's virtual Jackson Hole symposium to set the stage for a shift in the Fed's approach to inflation. In fact, he formally announced a new era. In a hotly-anticipated speech that could echo for years, Powell expounded on the Fed’s policy framework review, which took on an extra sense of urgency when the pandemic ushered in a deflationary supernova, even as it introduced new upside risks for inflation down the road. The Fed has notoriously failed to bring inflation sustainably to target. The market has long anticipated a shift to average inflation targeting and generally expects officials to countenance overshoots in the interest of avoiding the kind of disinflationary dynamics that have gripped Japan for years and now threaten to spill over into the rest of the developed world. In essence, the market wants clarity. Whether Powell delivered in that regard will be the topic of vociferous debate for at least the next week, and very likely right up until the September FOMC. "If inflation runs below 2% following economic downturns but never moves above 2% even when the economy is strong, then, over time, inflation will average
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9 comments on “Jerome Powell’s Big Reveal: ‘Flexible Average Inflation Targeting’ Is Here

  1. calh0025 says:

    I guess the question at this point is… what has monetary policy got to do with inflation anymore? I mean unless you add index funds to the CPI. Fiscal policy is what is needed clearly. I mean wage growth barely occurred after a decade of accommodating monetary policy. I guess this just translates to what we already knew, perma zirp and QE pumping FAAMG to infinity and beyond.

  2. Matthew Poe says:

    CPI is not a good measure.. it is true that phones and televisions are less expensive.. The inflation related to important things line housing, healthcare and education has been much higher the 1% per year.

    • calh0025 says:

      No argument there but since it is what gets used primarily. An actual cost of living inflation metric would be much more useful but then it would also highlight how bad inflation has actually been compared to wage growth.

  3. brc says:

    So everything is the same as yesterday with the exception that the Feds let the market know that the market will not have to throw a temper tantrum again due to the Feds raising rates because the Feds will not raise rates. Just keep partying with equities and don’t let inflation worries get in the way of inflating equity prices.

  4. Anonymous says:

    Retrospective view of average inflation could lead or overly steep/inverted yield curves

  5. John Banjo says:

    Powell suggests you shouldn’t write that off as a mere semantic tweak. “This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation”,

    with current debt and demographic trends I think this is obvious and self evident…

    of course who’s gonna be hiring in next 24 months…?

  6. time to buy more shiny pet rocks

  7. George says:

    I think Powell has diplomatically affirmed that the Fed is groping at straws and (secretly) understands the undershoots (inflation) are really a result of flawed Policy and Methodology… He has a distinctly different tone than two years ago ….There have been several decades of radical structural changes in the way the World Economy functions and the old rules may in fact be outdated by what is to become a new World Order…
    H…has written extensively about a lot of this including MMT and the role of Reserve Currency , and what we might expect to be the transition to a different balance… That’s why we read these posts… I can’t help but always come to Ray Dalio and his extensive writings on this Topic……( although I confess I started reading mostly the parts highlighted in Bold print. after a while )
    Most of the Data we see leads to somewhat obvious conclusions yet Equity markets are off on their own page in another world perhaps. For sure something is changed but it’s not all Corona Virus caused…..

  8. Vlad is Mad says:

    It is useful to think of inflation in terms of the following well-known equation: Inf (t+0) = Infl (t-1) + Beta (Inflation expectations). Ask whether this policy tweak can materially shift expectations? Is it a big enough revolution to set them a a rising path?

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