The Fed targets an average annual inflation rate of 2% but, under its 2020 monetary policy framework, will tolerate a moderate overshoot to make up for past low inflation. The Fed has been willing to let the economy 'run hot' to sustain the post-pandemic recovery.
Inflation pressures and expectations will be only one guide to Fed policy; the path of the public health crisis will weigh more.
As policy is now anchored on inflation expectations, miscommunicating its next move would hurt the Fed more than the 2013 'taper tantrum'.
Structural economic transformation is making CPI less sensitive to resource slack, complicating the assessment of inflationary pressures.
If high inflation takes hold, the necessary high interest rates will strain the government's ability to service its record deficits.
