markets

Fed Officials See 2.1% Inflation in 2020 and That's a Big Deal

  • Higher-than-goal inflation projection underlines symmetry
  • First median estimate overshoot since goal formally adopted
Powell Says He Sees No Signs of Imminent Inflation Surge

Federal Reserve officials often say their 2 percent inflation target is “symmetric” -- they are equally concerned if price pressures run above or below that goal. Based on their latest economic forecasts, the U.S. central bank is gearing up to put monetary policy action where its mouth is.

Fed officials projected inflation averaging 2.1 percent in the fourth quarter of 2020, according to their median estimate published Wednesday. That tiny-but-important overshoot marks the first time the median Fed official has signaled that they expect inflation to rise above their 2 percent goal since it was formally adopted in 2012. Core inflation, which strips out volatile fuel and food prices, is expected to overshoot even sooner, hitting 2.1 percent in both 2019 and 2020.

Those slightly elevated readings will accompany super-low unemployment -- 3.6 percent next year and 2020, well below the 4.5 percent threshold that the Fed views as sustainable in the longer run -- and slightly restrictive interest rates, as monetary policy works to slow the economy. The median estimate for the federal funds rate in 2020 is 3.4 percent, above the 2.9 percent officials think would be necessary to neither speed nor slow the economy.

Officials submit projections based on what they view as appropriate monetary policy, so the fact that they are broadly acknowledging that price gains above their goal will happen is a evidence that they mean it when they say “symmetric,” and a clear sign that they see an economy poised to run a little hot, at least temporarily.

“Various forces will continue to affect inflation, at times it may be above 2 percent, just as at times it may be below,” Chairman Jerome Powell said at his post-meeting press conference, his first since taking the top Fed leadership role this year. “Our inflation objective is symmetric in the sense that we are trying to prevent persistent deviations from 2 percent in either direction.”

Undershooting

Inflation has run almost constantly below 2 percent since the Fed adopted its target in January 2012. While the Federal Open Market Committee regularly acknowledges that in its projections, penciling in low inflation in the near-term, the committee as a whole has been hesitant to prescribe interest rates that knowingly generate above-2 percent inflation.

To be sure, individual policy makers have occasionally forecast inflation above 2 percent, but they’ve generally been outliers whose forecasts were stripped out from the “central tendency” published with quarterly forecasts, which excludes the three highest and three lowest projections.

The Fed only began publishing median estimates in 2015, and since then, the median has always come in at 2 percent or less. Prior to that, the central tendency on headline inflation came in above 2 percent most recently in 2011 -- so that’s the last time the median could have feasibly surpassed the goal.

New Phenomenon

Since the Fed started offering median projections, they'd never shown plus-2 percent

Source: Federal Reserve economic projections

The fact that the median now projects an overshoot is “validating at least to a very limited extent the notion of a symmetric inflation target,” Krishna Guha, vice chairman at Evercore ISI, wrote in a post-meeting analysis.

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