While the new policy framework calls for overshooting the 2% inflation objective after a period of persistent undershooting, it does not explicitly describe the conduct of monetary policy once the overshoot has been achieved and the Committee wants to move inflation back to 2%.
Clarida’s Policy Rule for the New Framework
Clarida has said, “Consistent with our new framework, the relevant policy rule benchmark I will consult once the conditions for liftoff have been met is an inertial Taylor-type rule with a coefficient of zero on the unemployment gap, a coefficient of 1.5 on the gap between core PCE inflation and the 2 percent longer-run goal, and a neutral real policy rate equal to my SEP projection of long-run r*.”
The key feature of that rule is that, if inflation is above 2%, it prescribes that the FOMC should raise the funds rate relative to its neutral level, with the speed of this movement depending on the degree of inertia in the rule.
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