Evening Must-Read: Tim Duy: That Train Left the Station

Tim Duy: That Train Left the Station: “I was re-reading some of the recent overshooting debate and it occurred to me that it is comical that we are even having this discussion.

The Fed is not going to deliberately overshoot inflation, period.  That train left the station long ago. So long ago that you can’t even here the rumble on the tracks. The train left the station on January 25, 2012, with this statement by the Federal Reserve: ‘The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate.’ On that day, the Federal Reserve locked in the definition of price stability.  They locked it in specifically to prevent even the appearance they might deliberately overshoot as a result of extraordinary monetary policy. They locked it in as a commitment device to tie the hands of future policymakers as they would need to justify changing the definition of price stability, presumably a very high bar for any central banker to cross. On that day, the Federal Reserve took higher inflation expectations off the table.  They pulled it from the toolkit.  They made clear there is one and only one inflation target for all time.  The only tolerable deviations from that target are essentially forecast errors.  That’s it.