2 Jul 2013
Flash: Inflation targets key to Fed agenda – Goldman Sachs
FXstreet.com (New York) - According to the Economics Research Team at Goldman Sachs, “A target based on returning the level of nominal US GDP (NGDP) to its pre-crisis trend with an inflation knockout would be attractive to rates in a number of respects.”
First, “it would induce the expectation that policy will remain easy for a long time and would require no assumptions about labor participation or productivity. However, NGDP is subject to significant revision and is not widely understood by the public.” the team adds.
In our view, adopting an unemployment rate threshold with an inflation knockout – i.e., following the Fed’s precedent – represents a more practicable option. Given supply-side improvements in the UK labor market, we also favor adopting the Fed’s precise numerical thresholds: i.e., maintaining low rates at least until unemployment has fallen to 6.0%, provided that forecast inflation does not exceed 2.0%.
First, “it would induce the expectation that policy will remain easy for a long time and would require no assumptions about labor participation or productivity. However, NGDP is subject to significant revision and is not widely understood by the public.” the team adds.
In our view, adopting an unemployment rate threshold with an inflation knockout – i.e., following the Fed’s precedent – represents a more practicable option. Given supply-side improvements in the UK labor market, we also favor adopting the Fed’s precise numerical thresholds: i.e., maintaining low rates at least until unemployment has fallen to 6.0%, provided that forecast inflation does not exceed 2.0%.