Logical Analysis Report
Key Focus
- The broad willingness to accept overshooting implies that the Fed's policy review will conclude with a shift toward some form of average inflation targeting in which the central bank explicitly sets policy to compensate for errors such that inflation averages 2% over time.
The implication for financial markets is that the Fed expects to hold policy very easy for a very long time - It's a whole new ballgame.
The Fed's traditional Phillips curve approach to forecasting inflation, which relies on the theory that inflation accelerates as unemployment falls, was widely criticized during the most recent economic recovery - The Fed was eventually forced to lower rates 75 basis points in 2019 to put a floor under the economy. Inflation remained stubbornly below the Fed's 2% target throughout that period.
Faced now with the prospect of another prolonged period of low inflation, Fed officials are signaling they will place less emphasis on Phillips curve estimates when setting policy - The Fed would thus overshoot the inflation target and then return to the target from above.
Federal Reserve Bank of Philadelphia President Patrick Harker goes even further in a Wall Street Journal interview, saying "I don't see any need to act any time soon until we see substantial movement in inflation to our 2% target and ideally overshooting a bit." Expect to see more Fed speakers also saying they want inflation at or above 2% before they tighten policy.
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High Level Topics
INFLATIONFEDPOLICYUNEMPLOYMENTHigh Level Abstractions
INFLATION(7, 0 Order)( INFLATION )(7, 0 Order) top( INFLATION, FED )(4, 1st Order) top( INFLATION, POLICY )(4, 1st Order) top( INFLATION, UNEMPLOYMENT )(3, 1st Order) top( INFLATION, THE_FED )(1, 1st Order) top( INFLATION, ECONOMY )(2, 1st Order) top( INFLATION, RECOVERY )(1, 1st Order) top( INFLATION, OVERSHOOTING )(2, 1st Order) top( INFLATION, MARKETS )(1, 1st Order) top( INFLATION, WALL_STREET_JOURNAL )(1, 1st Order) top( INFLATION, TIGHTNESS )(1, 1st Order) top( INFLATION, RESERVE_BANK )(1, 1st Order) top( INFLATION, QUIESCENT )(1, 1st Order) topFED(6, 0 Order)( FED )(6, 0 Order) top( FED, POLICY )(5, 1st Order) top( FED, POLICY, INFLATION )(4, 2nd Order) top( FED, POLICY, OVERSHOOTING )(2, 2nd Order) top( FED, POLICY, WALL_STREET_JOURNAL )(1, 2nd Order) top( FED, POLICY, UNEMPLOYMENT )(1, 2nd Order) top( FED, POLICY, TIGHTNESS )(1, 2nd Order) top( FED, POLICY, RESERVE_BANK )(1, 2nd Order) top( FED, POLICY, PREEMPTIVELY )(1, 2nd Order) top( FED, POLICY, PHILADELPHIA_PRESIDENT_PATRICK_HARKER )(1, 2nd Order) top( FED, POLICY, OVERSHOOT )(1, 2nd Order) top( FED, POLICY, MOVEMENT )(1, 2nd Order) top( FED, POLICY, MARKETS )(1, 2nd Order) top( FED, UNEMPLOYMENT )(2, 1st Order) top( FED, OVERSHOOTING )(2, 1st Order) top( FED, ECONOMY )(2, 1st Order) top( FED, RECOVERY )(1, 1st Order) top( FED, WALL_STREET_JOURNAL )(1, 1st Order) top( FED, TIGHTNESS )(1, 1st Order) top( FED, RESERVE_BANK )(1, 1st Order) top( FED, PREEMPTIVELY )(1, 1st Order) top( FED, PHILADELPHIA_PRESIDENT_PATRICK_HARKER )(1, 1st Order) top( FED, OVERSHOOT )(1, 1st Order) topPOLICY(6, 0 Order)( POLICY )(6, 0 Order) top( POLICY, OVERSHOOTING )(2, 1st Order) top( POLICY, UNEMPLOYMENT )(1, 1st Order) top( POLICY, BRAINARD )(2, 1st Order) top( POLICY, WALL_STREET_JOURNAL )(1, 1st Order) top( POLICY, TIGHTNESS )(1, 1st Order) top( POLICY, THE_FED )(1, 1st Order) top( POLICY, RESERVE_BANK )(1, 1st Order) top( POLICY, PREEMPTIVELY )(1, 1st Order) top( POLICY, PHILADELPHIA_PRESIDENT_PATRICK_HARKER )(1, 1st Order) top( POLICY, OVERSHOOT )(1, 1st Order) topUNEMPLOYMENT(3, 0 Order)( UNEMPLOYMENT )(3, 0 Order) topReferences- ( INFLATION ) top
- ( INFLATION, FED ) top
- (Read more) top
The Fed's traditional Phillips curve approach to forecasting inflation, which relies on the theory that inflation accelerates as unemployment falls, was widely criticized during the most recent economic recovery - (Read more) topThe Fed was eventually forced to lower rates 75 basis points in 2019 to put a floor under the economy. Inflation remained stubbornly below the Fed's 2% target throughout that period.
Faced now with the prospect of another prolonged period of low inflation, Fed officials are signaling they will place less emphasis on Phillips curve estimates... - (Read more) top... Wall Street Journal interview, saying "I don't see any need to act any time soon until we see substantial movement in inflation to our 2% target and ideally overshooting a bit." Expect to see more Fed speakers also saying they want inflation at or above 2% before they tighten policy.
- (Read more) top The broad willingness to accept overshooting implies that the Fed's policy review will conclude with a shift toward some form of average inflation targeting in which the central bank explicitly sets policy to compensate for errors such that inflation averages 2% over...
- ( INFLATION, POLICY ) top
- (Read more) top
Faced now with the prospect of another prolonged period of low inflation, Fed officials are signaling they will place less emphasis on Phillips curve estimates when setting policy. - (Read more) top Fed Governor Lael Brainard said this week that "with inflation exhibiting low sensitivity to labor market tightness, policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence."
No longer are estimates of longer-run unemployment taken as almost... - (Read more) top... until we see substantial movement in inflation to our 2% target and ideally overshooting a bit." Expect to see more Fed speakers also saying they want inflation at or above 2% before they tighten policy.
- (Read more) top The broad willingness to accept overshooting implies that the Fed's policy review will conclude with a shift toward some form of average inflation targeting in which the central bank explicitly sets policy to compensate for errors such that inflation averages 2% over time.
The... - ( INFLATION, UNEMPLOYMENT ) top
- (Read more) top
The Fed's traditional Phillips curve approach to forecasting inflation, which relies on the theory that inflation accelerates as unemployment falls, was widely criticized during the most recent economic recovery. - (Read more) topInflation remained quiescent in the wake of the Great Financial Crisis even as the unemployment rate fell to 3.5%, well below the 2012 high estimate of the natural rate, or 5.6%
- (Read more) top
No longer are estimates of longer-run unemployment taken as almost certainly indicating the economy is at full employment. - ( INFLATION, THE_FED ) top
- (Read more) topInflation remained quiescent in the wake of the Great Financial Crisis even as the unemployment rate fell to 3.5%, well below the 2012 high estimate of the natural rate, or 5.6%. The Fed's commitment to Phillips curve-based inflation forecasts induced it to raise interest rates too early in the cycle and continue to boost rates into late 2018 even as faltering markets signaled the hikes...
- ( INFLATION, ECONOMY ) top
- (Read more) topThe Fed was eventually forced to lower rates 75 basis points in 2019 to put a floor under the economy. Inflation remained stubbornly below the Fed's 2% target throughout that period.
Faced now with the prospect of another prolonged period of low inflation, Fed officials are signaling they... - (Read more) top
No longer are estimates of longer-run unemployment taken as almost certainly indicating the economy is at full employment. - ( INFLATION, RECOVERY ) top
- (Read more) top... Fed's traditional Phillips curve approach to forecasting inflation, which relies on the theory that inflation accelerates as unemployment falls, was widely criticized during the most recent economic recovery.
- ( INFLATION, OVERSHOOTING ) top
- (Read more) top... Philadelphia President Patrick Harker goes even further in a Wall Street Journal interview, saying "I don't see any need to act any time soon until we see substantial movement in inflation to our 2% target and ideally overshooting a bit." Expect to see more Fed speakers also saying they want inflation at or above 2% before they tighten policy
- (Read more) top The broad willingness to accept overshooting implies that the Fed's policy review will conclude with a shift toward some form of average inflation targeting in which the central bank explicitly sets policy to compensate for errors such that...
- ( INFLATION, MARKETS ) top
- (Read more) top
The implication for financial markets is that the Fed expects to hold policy very easy for a very long time. - ( INFLATION, WALL_STREET_JOURNAL ) top
- (Read more) top
Federal Reserve Bank of Philadelphia President Patrick Harker goes even further in a Wall Street Journal interview, saying "I don't see any need to act any time soon until we see substantial movement in inflation to our 2% target and ideally overshooting a bit." Expect to see more Fed speakers... - ( INFLATION, TIGHTNESS ) top
- (Read more) top Fed Governor Lael Brainard said this week that "with inflation exhibiting low sensitivity to labor market tightness, policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence."
No longer are estimates of longer-run unemployment taken... - ( INFLATION, RESERVE_BANK ) top
- (Read more) top
Federal Reserve Bank of Philadelphia President Patrick Harker goes even further in a Wall Street Journal interview, saying "I don't see any need to act any time soon until we see substantial movement in inflation... - ( INFLATION, QUIESCENT ) top
- (Read more) topInflation remained quiescent in the wake of the Great Financial Crisis even as the unemployment rate fell to 3.5%, well below the 2012 high estimate of the natural rate, or 5.6%
- ( FED ) top
- ( FED, POLICY ) top
- ( FED, POLICY, INFLATION ) top
- (Read more) top
Faced now with the prospect of another prolonged period of low inflation, Fed officials are signaling they will place less emphasis on Phillips curve estimates when setting policy - (Read more) top Fed Governor Lael Brainard said this week that "with inflation exhibiting low sensitivity to labor market tightness, policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence."
No... - (Read more) topThe Fed would thus overshoot the inflation target and then return to the target from above.
Federal Reserve Bank of Philadelphia President Patrick Harker goes even further in a Wall Street Journal interview, saying "I don't see... - (Read more) top The broad willingness to accept overshooting implies that the Fed's policy review will conclude with a shift toward some form of average inflation targeting in which the central bank explicitly sets policy to compensate for errors such that inflation averages 2% over time.
The implication for financial markets is that the Fed expects to... - ( FED, POLICY, OVERSHOOTING ) top
- (Read more) topSee ( INFLATION , OVERSHOOTING )
- (Read more) top The Fed's current policy does not allow for such a strategy. The broad willingness to accept overshooting implies that the Fed's policy review will conclude with a shift toward some form of average inflation targeting in which the central bank explicitly sets policy to compensate for errors such that...
- ( FED, POLICY, WALL_STREET_JOURNAL ) top
- (Read more) topSee ( INFLATION , WALL_STREET_JOURNAL )
- ( FED, POLICY, UNEMPLOYMENT ) top
- (Read more) topSee ( INFLATION , UNEMPLOYMENT )
- ( FED, POLICY, TIGHTNESS ) top
- (Read more) topSee ( INFLATION , TIGHTNESS )
- ( FED, POLICY, RESERVE_BANK ) top
- (Read more) topSee ( INFLATION , RESERVE_BANK )
- ( FED, POLICY, PREEMPTIVELY ) top
- (Read more) top Fed Governor Lael Brainard said this week that "with inflation exhibiting low sensitivity to labor market tightness, policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence."
No longer are estimates of longer-run unemployment taken as almost certainly indicating... - ( FED, POLICY, PHILADELPHIA_PRESIDENT_PATRICK_HARKER ) top
- (Read more) top
Federal Reserve Bank of Philadelphia President Patrick Harker goes even further in a Wall Street Journal interview, saying "I don't see any need to act any time soon until we see substantial movement in inflation to our 2% target and ideally overshooting... - ( FED, POLICY, OVERSHOOT ) top
- (Read more) topThe Fed would thus overshoot the inflation target and then return to the target from above.
Federal Reserve Bank of Philadelphia President Patrick Harker goes even further in a Wall Street Journal interview, saying "I... - ( FED, POLICY, MOVEMENT ) top
- (Read more) top
Federal Reserve Bank of Philadelphia President Patrick Harker goes even further in a Wall Street Journal interview, saying "I don't see any need to act any time soon until we see substantial movement in inflation to our 2% target and ideally overshooting a bit." Expect to see more Fed speakers also saying they want inflation at or above 2% before they tighten policy - ( FED, POLICY, MARKETS ) top
- (Read more) topSee ( INFLATION , MARKETS )
- ( FED, UNEMPLOYMENT ) top
- (Read more) topSee ( INFLATION , UNEMPLOYMENT )
- (Read more) top
No longer are estimates of longer-run unemployment taken as almost certainly indicating the economy is at full employment. Instead, Brainard said the Fed should focus on achieving "employment outcomes with the kind of breadth and depth that were... - ( FED, OVERSHOOTING ) top
- (Read more) topSee ( INFLATION , OVERSHOOTING )
- (Read more) topSee ( FED , POLICY , OVERSHOOTING )
- ( FED, ECONOMY ) top
- (Read more) topSee ( INFLATION , ECONOMY )
- (Read more) top
No longer are estimates of longer-run unemployment taken as almost certainly indicating the economy is at full employment. Instead, Brainard said the Fed should focus on achieving "employment outcomes with the kind of breadth and depth that were only achieved late in the previous recovery."... - ( FED, RECOVERY ) top
- (Read more) topSee ( INFLATION , RECOVERY )
- ( FED, WALL_STREET_JOURNAL ) top
- (Read more) topSee ( INFLATION , WALL_STREET_JOURNAL )
- ( FED, TIGHTNESS ) top
- (Read more) topSee ( INFLATION , TIGHTNESS )
- ( FED, RESERVE_BANK ) top
- (Read more) topSee ( INFLATION , RESERVE_BANK )
- ( FED, PREEMPTIVELY ) top
- (Read more) topSee ( FED , POLICY , PREEMPTIVELY )
- ( FED, PHILADELPHIA_PRESIDENT_PATRICK_HARKER ) top
- (Read more) topSee ( FED , POLICY , PHILADELPHIA_PRESIDENT_PATRICK_HARKER )
- ( FED, OVERSHOOT ) top
- (Read more) topSee ( FED , POLICY , OVERSHOOT )
- ( POLICY ) top
- ( POLICY, OVERSHOOTING ) top
- (Read more) topSee ( INFLATION , OVERSHOOTING )
- (Read more) top ... which the Fed compensates for a period of below-target inflation with a period of above-target inflation. The Fed's current policy does not allow for such a strategy. The broad willingness to accept overshooting implies that the Fed's policy review will conclude with a shift toward some form of average inflation targeting in which the central bank explicitly sets policy to compensate for errors such that...
- ( POLICY, UNEMPLOYMENT ) top
- (Read more) topSee ( INFLATION , UNEMPLOYMENT )
- ( POLICY, BRAINARD ) top
- (Read more) topInstead of an inflation forecast, the Fed will rely on actual inflation outcomes to determine the appropriate time to change policy. Brainard pointed out that "research suggests that refraining from liftoff until inflation reaches 2% could lead to some modest temporary overshooting, which would help offset the previous underperformance."...
- (Read more) top... attempts to reach the inflation target from below, effectively using the unemployment rate to forecast inflation and then moderating growth such that projected inflation doesn't exceed its target. Brainard is saying the Fed should not tighten policy until actual inflation reaches 2%. the time between the Fed's actions and the resulting economic outcomes
- ( POLICY, WALL_STREET_JOURNAL ) top
- (Read more) topSee ( INFLATION , WALL_STREET_JOURNAL )
- ( POLICY, TIGHTNESS ) top
- (Read more) topSee ( INFLATION , TIGHTNESS )
- ( POLICY, THE_FED ) top
- (Read more) top ... "previous underperformance," she is giving a green light to a "make-up" strategy in which the Fed compensates for a period of below-target inflation with a period of above-target inflation. The Fed's current policy does not allow for such a strategy. The broad willingness to accept overshooting implies that the Fed's policy review will conclude with a shift toward some form of average inflation...
- ( POLICY, RESERVE_BANK ) top
- (Read more) topSee ( INFLATION , RESERVE_BANK )
- ( POLICY, PREEMPTIVELY ) top
- (Read more) topSee ( FED , POLICY , PREEMPTIVELY )
- ( POLICY, PHILADELPHIA_PRESIDENT_PATRICK_HARKER ) top
- (Read more) topSee ( FED , POLICY , PHILADELPHIA_PRESIDENT_PATRICK_HARKER )
- ( POLICY, OVERSHOOT ) top
- (Read more) topSee ( FED , POLICY , OVERSHOOT )
- ( UNEMPLOYMENT ) top
- (Read more) top It's a whole new ballgame.
The Fed's traditional Phillips curve approach to forecasting inflation, which relies on the theory that inflation accelerates as unemployment falls, was widely criticized during the most recent economic recovery. Inflation remained quiescent in the wake of the Great Financial Crisis even as the unemployment rate fell to 3.5%, well below...
- (Read more) top ... market tightness, policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence."
No longer are estimates of longer-run unemployment taken as almost certainly indicating the economy is at full employment. Instead, Brainard said the Fed should focus on achieving "employment outcomes with the kind of breadth and depth that were...
- (Read more) top... overshooting, which would help offset the previous underperformance."
Think about what she is saying. Traditionally, the Fed attempts to reach the inflation target from below, effectively using the unemployment rate to forecast inflation and then moderating growth such that projected inflation doesn't exceed its target