The Fed may soon let inflation run a little hotter than usual, Goldman says

Goldman Sachs says the is likely to let inflation run higher than its 2 percent target.

The central bank has begun a monthslong review of its policy framework to consider alternative approaches to targeting inflation. Goldman believes the Fed will decide to next year, which would take rate hike off the table.

“Our economists believe it is leaning toward adopting an average inflation targeting approach. If implemented, they believe this change would decrease the likelihood of further near-term policy tightening and lead to a small and gradual increase in both expected and realized price inflation,” Goldman equity strategist Ben Snider said in a note.

Since 2012, the Fed has always been attempting to hit a 2 percent inflation target, but the rate of price rises has fallen short through much of the recovery from the recession. The alternative approach that Goldman expects the Fed to adopt calls for targeting 2 percent on average over the business cycle, which encourages higher prices during expansions to balance weak inflation during recessions. New York Fed President John Williams is of this framework.

Fed chief Jerome Powell during his February testimony before the House Financial Services Committee said the central bank is examining alternatives to its target, adding that it‘s not looking at a higher inflation target.