The Federal Reserve’s complete change last year wasn’t something that happened all at once. There were several hints that a lot was going on behind the scenes that may never become public, including five years (now four) down the road when the full policy transcripts are released to the public. There was more interest in R* and secular stagnation, for one, as well as changing thoughts on inflation expectations.

The latter has been an important topic for policymakers all along, but more so going back to early 2012. After all, by last March the PCE Deflator hadn’t registered 2% in compliance with the Fed’s mandate for four years at that point despite massive additional balance sheet expansion ($1.7 trillion through QE3 and QE4). Through it all, maintaining that it wasn’t but a “transitory” concern, Janet Yellen in particular remained steadfast that long run inflation expectations (anchor) had not changed.

In a speech on March 29 last year, her position suddenly softened. The events that started 2016, grand global liquidations, could be nothing other than such a wakeup call. The Fed after all had been projecting nothing but clear sailing as far back as 2014, but here the economy and markets were pulling off the exact opposite circumstances. She admitted to the Economic Club in New York last March:

Nevertheless, the decline in some indicators has heightened the risk that this judgment could be wrong.

The judgment she was referring to was those long run forecasts of so-called professional forecasters that never, ever budge in their assumptions that inflation expectations remain fully anchored right at 2%. That anchor at that level would mean a high degree of faith in monetary policy to by the long run get it right or fix whatever was ailing. The Fed’s preferred market-based inflation indicator, the 5-year/5-year forward inflation rate, desperately disagreed and more so all the time. It was projecting not just a continued miss on the inflation target but some pretty dour long run implications of what it might mean that Fed could be so powerless for so long even with great effort expended on their part.