Via Economic Policy Journal

Jay Powell

Adjust your seatbelts and hug your gold coins.

Fed Chairman Jerome Powell will speak Thursday during a virtual version of the Fed’s annual Jackson Hole, Wyoming conference.

Jeff Cox of CNBC reports that Powell is expected to outline what could be the central bank’s most active efforts ever to spur price inflation back to “a healthy level.”

Since there is no such thing as “a healthy level” of price inflation, Cox is correct this will be quite the speech.

The speech is titled “Monetary Policy Framework Review.”

According to Cox, who is likely getting this directly from the Fed, one phrase Powell is likely to use is “average inflation” targeting.

It means that the Fed, which has pegged 2% as its target, will let inflation run higher than that for a while because it has spent a considerable time beneath that level.

It has been below the 2% level for all but two years since the Great Recession ended in mid-2009.

In other words, Fed members will have a lot of room for price inflation to rip based on their new policy direction.

Cox adds that Powell’s speech could include a vow as well to keep policy as accommodative as possible until inflation and employment are both stabilized.

To fulfill both pledges, the Fed will need to commit to keeping rates anchored near zero until the goals are met. Where the move to what it calls the “zero lower bound” had been previously considered unusual, it now will become standard practice at least until the Fed meets its mandate.

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There is no way the Fed pulls this off without blowing price inflation through the roof. They are working with models that project a steady rise in inflation. They have no idea, apparently, that price inflation can get way out of control, above 5%, very rapidly and that it would then require short-term rates of near 7% rather than zero to choke of the price inflation.

But the Fed is not going to raise short-term rates to 7% anytime soon and so the price inflation could eventually advance well above 5%.

RW