Halister News

(Bloomberg) -- Fed will “deliberately engineer a modest, sustained overshoot of its inflation target,” by letting economy “run hot for a while,” BofAML economist Ethan Harris wrote in note Friday.

• While Fed hasn’t announced such a policy, it’s taking “very high” risk of such overshoot; “in our view, that is observationally equivalent to an intentional overshoot”
• If inflation does overshoot, Fed would likely hike rates only enough to avoid “a big overshooting”
  • Rather than try to actively push inflation down, they would wait for inevitable recession “to do the dirty work”
• One implication would be that Fed will continue to react very slowly to signs of inflation; in addition, there would likely be further upward pressure on inflation break-evens and Fed would be extending rally in risk assets
  • With higher inflation, nominal funds rate should peak at higher level, giving Fed more ammunition to fight next recession
• BofAML’s conviction about mid-yr Fed hike “has been slipping”; “so-so” employment report was “final straw”
  • Mid-yr hike isn’t impossible, yet “center of gravity” has moved out
  • Now sees hikes in Sept., March 2017