Tim Duy, Columnist

The Fed Makes a Risky Bet on Overshooting Its Inflation Target

Consumer prices rising at a 2.1 percent rate could be toxic when combined with very low unemployment.

March 22, 2018 at 6:23 PM UTC

Tim Duy is a professor of practice and senior director of the Oregon Economic Forum at the University of Oregon and the author of Tim Duy's Fed Watch.

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The Federal Reserve concluded its March meeting on Wednesday with a widely expected 25 basis-point rate hike and a promise of more to come. The accompanying Summary of Economic Projections also signaled that the Fed expects to overshoot its inflation target. Within the context of the central bank's framework, policy makers have little choice but to accept some overshooting of inflation. The alternative is a much costlier recession.

With factors including additional fiscal stimulus and a weaker dollar serving as tailwinds for the outlook, the Fed anticipates stronger economic growth compared to projections of last December. Consequently, the unemployment forecast for 2018 fell to 3.8 percent, a 0.1 percentage-point decline. In addition, central bankers expect another 0.2 percentage-point decline in 2020, to 3.6 percent.