Does the Fed Want Inflation to Overshoot? – Goldman Sachs

Does the Fed Want Inflation to Overshoot? – Goldman Sachs

6 May 2016, 14:54
Roberto Jacobs
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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.”


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