Bullard: Current Situation "Test" For Avg Inflation Targeting

Unsurprisingly, Kaplan and Bullard see it as appropriate to start talking about tapering, and both see MBS tapering as part of the overall asset purchase program as a point of debate going forward. The discussion moves onto flexible average inflation targeting (FAIT) under the Fed's new framework, which is under market scrutiny given last week's hawkish FOMC decision:

• Kaplan says the debate about the framework is on how to execute the framework, not the framework itself. This gets into risk management. Kaplan wants to see expectations anchored at 2%, but also wants to manage tail risk to the upside. Moderating asset purchases sooner rather than later make it more likely the Fed is able to achieve the framework objectives on inflation. He says the framework doesn't say where to set rates, doesn't say you have to set rates at zero. It says the Fed is more pre-emptive. If you drive a little slower, say 65mph vs 75-80mph, makes it more likely that we average inflation of 2%. The problem, he says, is if it's "stop-go".
• Bullard says that the framework means the Fed is more patient when inflation impulses come along - and that's what's happening now. Says they got to test the framework within the first year of its existence, and looks like they will tolerate the current overshoot. Says it's going "very well" but it's a volatile environment with inflation risks, and the taper discussion creates"optionality" for the FOMC. Wants to telegraph taper well ahead of time.