The subtle push for price level targeting continues

  • The Federal Reserve’s persistent undershooting of its inflation target sparked comments about a move to price level target at the past two FOMC meetings.
  • In our view, introducing a price level target would help the Federal Reserve return inflation to 2%, but it would face some operational hurdles.
  • At the current stage we put 15% probability of the Federal Reserve adopting a price level target in the coming years and in 2019 at the earliest.
  • The introduction of a price level target would have a negative impact on the USD.
  • Momentum for a shift to price level targeting is building The Federal Reserve continues to struggle to meet its 2% inflation target, which it has undershot since the target was formally introduced in 2012.

In the Minutes from the December FOMC meeting the idea of introducing a price level target to solve this issue was mentioned again (see quote from Minutes below). It was first mentioned in the November FOMC Minutes and former Federal Reserve chairman Ben Bernanke also discussed it last autumn (see for instance his blog here).

‘Due to the persistent shortfall of inflation from the Committee's 2 percent objective, or the risk that monetary policy could again become constrained by the zero lower bound, a few participants suggested that further study of potential alternative frameworks for the conduct of monetary policy such as price-level targeting or nominal GDP targeting could be useful.’

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