HALISTER1: Fed Learning That Overshooting 2% Inflation Is Prudent: BofAML

Fed Learning That Overshooting 2% Inflation Is Prudent: BofAML

(Bloomberg) -- Yellen’s Oct. 14 comments on “high pressure economy” represent another reason to overshoot inflation target, BofAML economist Ethan Harris writes in note Friday.
  • NOTE: In Oct. 14 speech, Yellen said there are “plausible ways” that running economy hot could fix damage caused by last recession
  • Fed “slowly figuring out” that overshooting its target is prudent policy
  • “In our view, the U.S. labor market is suffering from hysteresis,” which could be partly reversible
  • In response to question about whether Fed should “experiment” and see if “high pressure economy” reverses some of hysteresis, “our answer is simple: why not?”
    • Overshooting when economy is “hot” ensures inflation averages 2% going forward while reducing risk of tightening too soon and hitting lower bound
  • Weak economy probably did some structural damage; extending the cycle could undo some of that damage
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Ethan Harris (Bank of America Corp)
Janet Yellen (Federal Reserve System)

Topics
BGOV Finance

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