BERKELEY – AS OF Friday, May 6, the bond market expected US consumer price inflation to average 2.5 per cent between five and ten years from now. That is the rate of inflation needed to equalise returns on inflation-indexed and non-indexed US Treasury securities. And given that CPI inflation has been running higher than the rate associated with the implicit price deflator for personal consumption expenditures, I count that 2.5 per cent five-year, five-year-forward rate as hitting the US Federal Reserve’s 2 per cent price-deflator inflation target.

What, then, would it take to get the economy back to the Fed’s targeted inflation rate? Since the five-year breakeven rate at the close of May 6 was 3.22 per cent, the implicit expectation is that inflation will run a cumulative total of 3.6 percentage points above the Fed’s target over the next five years. If it does not cause the economy’s inflation anchor to vanish, a deviation of that size would be an exceedingly small price to pay for the rapid recovery from the pandemic-induced recession. If the recovery delivers the structural economic transformation that we need, the higher inflation that we have experienced will have been well worth it.

Accordingly, it seems to me that the Fed should be taking a victory lap. It has done precisely what it is supposed to do, by enabling America’s sticky-price, sticky-wage, sticky-debt economy to return rapidly not just to full employment but to the right version of full employment – the one that has workers working in sectors making products for which there is real, fundamental demand – after a shock. And it has done so without disrupting confidence in the monetary system and its stability.