Fed’s tolerance for above-target inflation close to the limit

While the Fed’s inflation misses over the past two years are primarily due to unanticipated shocks, the FOMC has arguably also become more accepting of above-target inflation as it seeks to balance the full employment side of its mandate. Nonetheless, after five years of above-target inflation, officials are clearly beginning to doubt the wisdom of continuing to “look through” such shocks, suggesting the Fed is more likely to respond with hikes than would have been the case in the recent past.