Has the Fed set a “dove trap”?

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Via Tim Duy at FedWatch:

The Federal Reserve quickly switched gears between December 2018 and March 2019 as policy became “patient” and the two rate hikes projected for 2019 fell to zero. The backdrop for the shift was stumbling markets, softer growth data, and falling inflation. Fed officials find the turnaround of inflation particularly worrisome. Since adopting an inflation target in 2012, the Fed, in the words of Chairman Jerome Powell, has not “convincingly achieved our 2 percent mandate in a symmetrical way.”

The failure of the Fed to meet its self-defined inflation objective yields a number of both short- and long-term negative outcomes. At a most basic level, the continuing suboptimal inflation outcomes suggest policy has been too tight throughout the expansion that followed the Great Recession. Unemployment could have been reduced more quickly and could possibly still be held sustainably lower than current Federal Reserve forecasts anticipate. Another concern is that persistently low inflation is eroding inflation expectations which, though little understood (see Tarullo (2017)), anchor the Fed’s inflation forecast. The Fed would need to provide even easier policy should they want to firm up those expectations.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.