Does the Fed Want Inflation to Overshoot? – Goldman Sachs
Jan Hatzius, Research Analyst at Goldman Sachs, suggests that many
investors believe that the Fed has significantly changed its attitude to
an inflation overshoot above 2%.
Key Quotes
“The
strong version of this view is that Janet Yellen is stealthily
following the “optimal control” path she laid out in 2012 and is
therefore targeting an overshoot. We think this is wrong. The only good
reason to follow the 2012 optimal control path now would be to deliver
on an earlier commitment, and neither the Fed as an institution nor
Janet Yellen as an individual actually committed to such a path. What
matters now is optimal policy from the perspective of 2016, not 2012.
That policy does not feature an overshoot.
The weaker version is
that the target has become more unambiguously symmetric, and that many
Fed officials would privately regard a limited overshoot as helping
establish that symmetry in the public’s mind. This is probably correct.
But the FOMC would still want to prevent the overshoot from getting too
large, and would therefore tighten policy more quickly than in the
baseline. Given where the front end of the yield curve is priced, this
could result in a sizable tightening of financial conditions.”