Jack Janasiewicz, portfolio strategist at Natixis Investment Managers, reminded Fed President Jerome Powell’s eagerly awaited speech on Thursday that the US Federal Reserve is aiming for a double mandate – price stability and maximum employment. The recent economic environment has threatened both objectives in extreme ways, so a review of the existing policy is highly relevant. This is particularly evident from the inflation target of two percent.
Janasiewicz: “The application of an asymmetrical inflation target has become a hot topic lately. The problem with a declared inflation target of two percent: It can stifle any emerging economic recovery. Economists have called the inflation target an “old-fashioned” strategy – one that doesn’t try to catch up with past defaults. Just think of the lost nominal GDP caused by the lockdowns associated with the COVID19 pandemic. With an economic recovery we would expect inflation to return to its target level of 2 percent, while nominal GDP has not yet reached its pre-crisis peak. But the Fed would seek to tighten monetary policy once its inflation target has been reached – long before the lost GDP growth is caught up again. The economy has to overheat to fill the economic holes created by the pandemic. Perhaps this type of “catch-up” growth requires some sort of alignment with nominal GDP levels. Perhaps this will require inflation to be allowed to exceed the 2 percent threshold for the time being. In broader terms, perhaps we need an asymmetrical inflation target that centers inflation expectations back on an “average” level and not on a specific target value at a specific point in time. Be that as it may, it is about giving the economic recovery a chance to return to the pre-recession growth path, rather than possibly nipping that path in the bud just because an inflation target of two percent is hit sooner. “
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