Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
Today’s Federal Reserve Board announcement holding the Federal funds rate steady now toward a second year (the “pause” of last summer now clearly taking on a life of its own) seemed to include a subtle change in emphasis on what level of inflation is within the Fed’s famous “comfort zone”. Such a shift would be particularly significant with a Chair who explicitly favors inflation rate targeting.
Specifically, the Fed dropped the word “elevated” from its description of current inflation readings and substituted instead two new phrases: (1) that “core inflation” readings “have improved modestly” and (2) that moderation in “inflation pressures” has “yet to be convincingly demonstrated”.
Does this signify that, if the current rate of core inflation (down from 2.4% to clsoer to 2.2% in “recent months”) stays put for a few more months, the Fed’s “predominant policy concern” would no longer be “that inflation will fail to moderate as expected”? If that is the case, do we see a slight moving of the goal posts from a target of inflation running “between 1% and 2%” — as most previous statements from Fed officials have suggested – to more like “around 2%”? That change would be significant, and perhaps would offer a more realistic “‘target” for an economy that carries the burden of world leadership in sustaining growth, if only because of its size.
Later this summer, the Fed will issue new forecasts for growth and prices, and we may see if Chairman Bernanke offers a forward vision that “splits the uprights” of the possibly new inflation goal posts. At about the same time, the minutes of this very interesting June Fed meeting will also become available for the markets to ponder. Meanwhile, there will be even more guesswork in the trading rooms of Wall Street — ironically in the wake of a two day Fed meeting that was particularly devoted to the issue of how to improve communication with the markets!
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