Minneapolis Fed President Narayana Kocherlakota in a speech this morning suggested implementation of price level targeting by the Fed because he believes inflation could remain below 2% until 2018. It is suggested that under price level targeting, the Fed would allow inflation to run in excess of the 2% target level for several years in order to offset the effects of low inflation experienced over the past several years.
What’s the point? We think this is part of the reason why the stock market is up today. Kocherlakota comments have several important implications: 1) provides some insight into Federal Reserve thinking that they may believe inflation will remain low for an extended period; and 2) it suggests Federal Reserve policy could remain very accommodative for much longer than many now believe. This would have positive implications for financial assets, such as stocks and bond. One other factor we believe may be at work: the Federal Reserve may be learning they do not understand inflation (and its causes) as well as they or many others believe.