Mohamed El-Erian: We may have just seen a central bank shift that will go down in history

financialpost.com:

It would not surprise me if future economic history books were to look back at the last week in central banking as marking a move away from strict inflation targeting by the world’s most influential central banks.

While far from being definite or risk free, it is a shift that would be consistent with superior economic outcomes and stands a reasonable chance of working. And it is a policy approach that is likely to be superior to others as central banks tackle an operating environment that is particularly fluid economically and politically at domestic and global levels.

It is not often that you see a reputable central bank revise up its inflation and growth projections and yet strengthen a dovish tilt to its policy stance. Yet that is what happened in Washington last week when the United States Federal Reserve raised those projections up a notch and yet delivered two consequential signals: a willingness to tolerate higher inflation for longer and an openness to slow the ongoing reduction in its balance sheet.

Reacting to these unexpected signals of monetary policy patience, markets pushed stocks and gold significantly higher to record levels. Moreover, bond prices rose as traders became more confident that the Fed might cut interest rates as early as June despite hotter-than-expected inflation reports for January and February.

Fed chair Jay Powell justified the central bank’s stance by saying the inflation story was “essentially the same” despite this data and the upward revision in its own inflation projections.

But the Fed was not the only central bank that markets deemed surprisingly dovish. Two days before the Fed, the Bank of Japan wrapped its first interest rate increase in 17 years in dovish packaging. Despite the