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From our analysis, we found the following most relevant: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 timeIt'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 recoveryThe 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 policyThe 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.