“That’s how I interpret a symmetric inflation target,” he added. “But different people may interpret it differently.”
While it’s likely that others will see it differently -- Kashkari is, after all, one of the Fed’s most dovish members -- the central bank has signaled a willingness in the past to allow inflation to rise to 2.5 percent.
In December 2012, the FOMC pledged to keep interest rates pinned near zero as long as “inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal.”
Of course, the Fed’s tolerance for above-target inflation will depend on what else is going in the economy and financial markets.
If inflation rose quickly to 2.5 percent within a year, policy makers would be less willing to accept it than if it occurred gradually, said Steven Englander, head of research and strategy at Rafiki Capital.
A lot will also depend on what happens to inflation expectations, according to Mark Zandi, chief economist at Moody’s Analytics Inc.
“They would be comfortable overshooting the 2 percent target just as long as inflation expectations remain anchored,” he said. “If they look like they’re becoming unanchored, that will be the Rubicon they just won’t cross.”
Investors currently expect average annual increases in the consumer-price index of 2.1 percent over the next 10 years, based on trading in the bond market. That’s up from last year’s low of 1.67 percent set in June.
St. Louis Fed President James Bullard called the rise in inflation expectations a “welcome development” on Monday at a National Association for Business Economics conference in Washington.
Yet despite appearances, bond traders are still expecting inflation below the Fed’s goal. That’s because the Fed targets the personal consumption expenditures price index, not the consumer-price gauge used to adjust Treasury Inflation-Protected Securities. Since 1990, CPI inflation has averaged a half percentage point more than the PCE.