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Wednesday, May 02, 2018

The FOMC's Symmetric 2 Percent Inflation Objective

by Calculated Risk on 5/02/2018 03:54:00 PM

A few excerpts from Tim Duy at Fed Watch: Fed Holds Rates Steady

The most important news from the FOMC statement was the hint that the Fed would not overreact with substantial policy changes in response to inflation readings modestly above 2 percent. ...

... Most notable was the addition of “symmetric” in this line:
Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term.
Inflation is now very near the Fed’s target and it is reasonable to expect some overshooting of that target. Central bankers are reminding market participants that the inflation target is symmetric such that they will tolerate reasonable short-run deviations from target in the near term. In other words, don’t freak out if inflation exceeds 2 percent as that alone will not drive the Fed to change policy.
And from Merrill Lynch:
As was widely expected, the FOMC kept the fed funds target range unchanged at 1.50-1.75%. The most significant change in the statement came in the second paragraph where the Committee included the word "symmetric" in characterizing its inflation target. This is consistent with the March SEP which showed that the median forecast was expecting core inflation to hit 2.1% in 2019-2020, allowing for inflation to rise slightly above its target in the medium run. The inclusion of the word "symmetric" helped offset the more hawkish tone in the prior paragraph which highlighted that core inflation is moving closer to 2%. In our view, the FOMC's balanced tone reemphasizes its expectations to adjust the path of policy gradually throughout the current hiking cycle.
emphasis added