To read the full version of this content please select one of the options below:

The Fed will be very cautious about policy tightening

Tuesday, June 15, 2021

Significance

The Fed targets an average annual inflation rate of 2% but, under its 2020 monetary policy framework, will tolerate a moderate overshoot to make up for past low inflation. The Fed has been willing to let the economy 'run hot' to sustain the post-pandemic recovery.

Impacts

  • Inflation pressures and expectations will be only one guide to Fed policy; the path of the public health crisis will weigh more.
  • As policy is now anchored on inflation expectations, miscommunicating its next move would hurt the Fed more than the 2013 'taper tantrum'.
  • Structural economic transformation is making CPI less sensitive to resource slack, complicating the assessment of inflationary pressures.
  • If high inflation takes hold, the necessary high interest rates will strain the government's ability to service its record deficits.

Related articles

Expert Briefings logo
Stay up to date
Sign up to the Expert Daily Briefings email alert and receive up-to-the-minute analysis of global events as they happen.
*If your university does not have access to Expert Briefings, visit our information page to find out more.