Powell at Jackson Hole, and the Inflation Makeup Strategy

Powell announces a new policy framework in which inflation will be allowed to run above the target of 2% after a period in which it was below target. It is asymmetrical – there is no commitment to run inflation below target after a period above target. There is no specific formula for levels or duration of inflation overshoot. This was broadly expected. It means the Fed will let the economy “run hot,” definitively burying the growth-killing Phillips Curve and “automatic pilot” nonsense that marred Powell’s first year as chair. With so much relief and stimulus in the economy, deflation has already been arrested after just three months and a tiny CPI dip. A rise in inflation may soon put the Fed’s new framework into action -- or, rather, inaction.