Inflation overshoot fades over Fed hike

Bloomberg

The Federal Reserve spent early 2018 assuring investors it wouldn’t fret if inflation climbed above its 2 percent target. That possibility now looks increasingly distant.
Oil prices have slumped, weighing on expectations. Housing, a big inflation contributor throughout this cycle, is cooling. And while the core version of the Fed’s preferred price index touched 2 percent this year, Fed research found that potentially fleeting factors drove the increase. Commerce Department data showed that core inflation came in at 1.9 percent in the year through November — close to, but still shy of, the Fed’s goal.
“We’re trying to be symmetrically around two percent,” Chairman Jerome Powell said of inflation, speaking after the Fed raised interest rates for the fourth time this year. “We’ve been close to that. We haven’t gotten there yet, and we have not declared victory.”
Notwithstanding that nod towards symmetry, the Fed’s post-meeting policy statement and economic forecasts showed little appetite for allowing prices — stubbornly low for most of the past decade — to rise faster than 2 percent for any substantial period.
Officials downgraded their previous expectation that core inflation would reach 2.1 percent in each of the next three years. The median policy maker now sees it at 1.9 percent this year before hovering at 2 percent for the rest of the forecast through 2021. And officials projected continued rate increases despite that benign inflation outlook, which should tamp down any price pressures that do exist.
“They aren’t going to try to engineer things going above 2 percent just in order to say, ‘Hey, we’re symmetric around our target’,” said Alan Detmeister, an economist at UBS Securities LLC and former head of the Fed’s division on prices and wages.
The Fed doesn’t officially aim to average 2 percent over time. In fact, policy makers sometimes describe symmetry as being equally unhappy about undershooting and overshooting their goal. But in practice, after being under their goal for years, they’ve talked about a period of overshooting with ambivalence. “It’s completely fine to go above 2 percent for some time,” Chicago Fed President Charles Evans said in October. “In fact we ought to average two, be above two, half the time, perhaps.”
Those comments came when prices were gradually moving higher and an overshoot looked probable. Now, continued undershoot is increasingly likely.