Is the Fed Willing to Let Inflation Run Hot?

The transcript discusses the Federal Reserve's stance on inflation expectations, highlighting that current market-based measures are below the Fed's long-term target. It explores the possibility of the Fed allowing inflation to run higher and the implications of US real interest rates on global financial conditions. The Fed's communication strategy aims to retain the option to hike rates, with improving labor market data and inflation indicators. The discussion also touches on the Fed's inflation target and the credibility of market expectations.

Why is the Fed skeptical about current inflation expectations?

• They match the long-term target.

• They are lower than the long-term target.

• They are higher than the long-term target.

• They are irrelevant to the Fed's strategy.

What happened to US real interest rates in the back half of 2015?

• They remained stable.

• They decreased significantly.

• They increased from negative to positive.

• They became irrelevant.

What does the Fed want to achieve by retaining the optionality to hike rates?

• To ensure inflation remains low.

• To guarantee a fixed interest rate.

• To respond flexibly to economic changes.

• To eliminate market uncertainty.

How does the Fed's inflation target differ from market-based measures?

• The Fed uses PCE, while markets use CPI.

• The Fed does not have a specific target.

• Both use the same measures.

• The Fed uses CPI, while markets use PCE.

What is the significance of the five-year, five-year breakeven rate for the Fed?

• It indicates the Fed's credibility in reaching its inflation target.

• It is irrelevant to the Fed's strategy.

• It determines the Fed's interest rate policy.

• It measures the Fed's success in controlling inflation.