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US: The Fed Faces A “Complete Nightmare”: Convincing The Public That Higher Inflation Is Good For Them

Yesterday we explained why Bank of America, a contrarian voice among Wall Street banks, believes that hopes for an explicit announcement of Average Inflation Targeting (AIT) by Jerome Powell in his highly-anticipated speech titled “Monetary Policy Framework Review” to be delivered at 910am on Thursday which wraps up an examination of inflation which started in early 2019 among both among central bank officials and the public, will be a disappointment.

The first reason that an explicit policy would entail picking a specific time period over which PCE inflation is required to average 2% before beginning a policy normalization (hiking) process. This is a problem, because in simulations conducted by the BofA rates team, it found this could in require the Fed to remain on hold for 42 years!

Furthermore, explicit AIT could also cripple the Fed’s already waning credibility, not least of all because “it would also bring up difficult issues around the appropriate time period to calculate averages and the maximum realized inflation rates the Fed would tolerate while the average climbs higher.” Ultimately, BofA concludes that an explicit policy of AIT could greatly complicate both Fed communication and logistics. This would risk a reduction in the Fed’s credibility, which is already vulnerable given:

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