FED’s inflation communications review

Taking a look at the comments from Janet Yellen, current FED chair, from historic perspective to understand FED's inflation stance.

Back in 2009, Chair Yellen said,

• According to her understanding, short term means one to Two year, medium term means up to six years and long term would be anything beyond.
• According to her medium term objective might be achieved within the prescribed period with some compromise with another part of the mandate that is maximum employment.
• However in 2009, she felt FED's medium term objective of reaching 2% inflation might not be achievable in the medium term, given the adverse scenario then.

This means FED might not have achieved 2% by 2015, according to her back then.

In 2012, she commented,

• Inflation over the longer run is determined by monetary policy primarily, so that can be communicated by Federal Reserve, which will act to keep it well anchored.
• She mentioned according to FOMC participants, 2% inflation goal is in line with longer run objective that is beyond six years.
• So 2% at the earliest coming around 2018 and beyond.

FOMC target inflation need not reach 2% every annum, however deflationary pressure or disinflation would be handled with prompt policy actions.

Given such, inflation need not reach 2% for the first rate hike.

Confusion -

• Former FED chairman, Ben Bernanke in a recent article argues that FED's ability to influence real rates (which is nominal adjusted inflation) over the longer run is limited and transitory and determined mainly thorough economic activities.

Hence comes the confusion over FED's true ability to influence inflation in the long run.