Powell’s approach to inflation has been described as “fuzzy” compared to his predecessors. Maybe it’s because of his background in law.
Asked at the FOMC press conference what the Fed means by “moderate,” Powell said, with perhaps a hint of frustration, “It means not large. It means not very high above 2%. It means moderate. I think that’s a fairly well-understood word.” He then added, “You know, we’re resisting the urge to try to create some sort of a rule or a formula here.”
The approach policymakers settled on involves more discretion than the Fed has exercised since the Greenspan era. Powell and others have refused to say how long or how much they will allow inflation to overshoot 2%. Consider this: Inflation would have to average 3% from now until April 2026 for the price level to reach where it would have been if inflation had been 2% since 2012. It’s unlikely the Fed would let that happen because it doesn’t want shoppers to start thinking of 3% inflation as the new normal. On the other hand, just a month or two of, say, 2.1% inflation wouldn’t be much of a makeup.
Market participants may have to read between the lines until the end of Powell’s testimony tomorrow.