The Fed’s Quest for Higher Inflation: What Could Go Wrong?

by Stefan Gleason

The Federal Reserve is warning investors in no uncertain terms that higher rates of inflation are coming. Yet markets, for the most part, have disregarded that warning.

Bond yields, for example, remain well below 2% across the entire duration range. Stock market valuations continue to reflect a sanguine outlook for inflation. And crude oil futures suggest limited upside pressure on prices.

It seems the Fed has a credibility problem.

In August, Fed Chairman Jerome Powell announced that the central bank would begin targeting an inflation “average” of 2%.

By the Fed’s measures, inflation has been running below 2% in recent years. So getting to a 2% average in the years ahead will require above 2% inflation for a significant period.

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