Yesterday I wrote a fairly conventional analysis of the outcome of the FOMC meeting and the subsequent press conference by Federal Reserve Chair Janet Yellen. I think that analysis is consistent with that of the median policymaker on Constitution Avenue: As long as the economy continues to grind upward at a moderate pace and inflation pressures remain constrained, the expected path of short term interest rates is one of a slow rise with the first hike somewhere around a year away.

That view is, of course, data dependent, and given the current readings on inflation and unemployment, combined with a policy stance that is basically ignoring both in favor of untested measures of underemployment, the risk is that the rate path is steeper, and the first hike comes sooner, than currently anticipated. Under the current circumstances, I expect the median policymaker's willingness to risk falling behind the curve will decrease during the next six months.

Moreover, I would caution against interpreting Yellen's soft inflation outlook as her being soft on inflation. I think quite the opposite message came through at yesterday's press conference. Yellen was showing her hawkish side.

First, note that the Fed's terminal Federal Funds rate edged down to 3.75% from 4% in March, a consequence of falling estimates of potential growth. The Fed thus appears to be conforming to the "new normal" in which equilibrium interest rates have fallen. In short, the Fed appears to take the terminal Fed Funds rates as exogenous.

The terminal Fed Funds rates, however, is not exogenous. It is an inflation markup over estimates of potential growth. The Fed could allow interest rates to return to normal by allowing expected inflation to rise. From the Fed's point of view, however, the inflation rate is really not an endogenous choice. They view the 2% target is essentially exogenous, a number handed down in scripture, an element of the Ten Commandments. That the Fed should allow estimates of the terminal Fed Funds rate to fall is a testament to their commitment to the 2% target.

Second, it is not clear that the potential growth rate is entirely exogenous. In her press conference, Yellen commented that lower potential growth estimates are a consequence of slower investment (less capital formation) and persistent damage to the labor market. In the secular stagnation scenario, however, these are arguably the consequences of holding real interest rates too high and deliberately allowing the cyclical damage to become structural. But at the zero bound, the Fed would need to target higher inflation expectations to lower the real interest rate further. That is not on the table. The lower bound on real interest rates is -2% because the upper bound on inflation is 2%.

In other words, Yellen and Co. are so committed to the 2% inflation target that they are willing to tolerate a persistently lower level of national output to maintain that target. That sounds pretty hawkish to me.

Finally, Yellen's willingness of allow overshooting of the inflation target are, in my opinion, less than meets the eye. Financial reporters very much need to pin her and other policymakers down on this topic. I suspect when they say overshooting, what they mean is no more than 25bp over target in the context of anchored inflation expectations. If inflation expectations are anchored, however, expected real interest rates are not changing. The loose comments about overshooting are nothing more than a commitment to not overreact to forecast errors. It doesn't mean that the Fed will not raise interest rates in the face of overshooting, only that they will calibrate the rate of increase relative to their confidence that the overshooting is a forecast error.

Bottom Line: Soft on the inflation forecast is not the same as soft on inflation. Don't underestimate the Fed's commitment to the 2% target. That commitment is what pushes the risk to the hawkish side of the policy equation in the current environment.