My focus here is whether FOMC’s new framework, Flexible Average Inflation Targeting, or FAIT, is really focused on achieving an average inflation rate of 2%. That is, is there AIT in FAIT? The word “average” is, to be sure, in the name of the new framework and appears in many discussions by FOMC participants of the new framework, as well as in the Strategy Statement and postmeeting statement.
As for me, from the beginning of the framework review, I expected that the new framework would not be an average inflation targeting regime, but would nevertheless embody the spirit of AIT. And I have interpreted FAIT as not being an average inflation targeting regime. Rather, the policy in practice (though it is to be seen) is to overshoot the 2% objective “moderately” and “for some time” after persistent undershooting. The goal is to keep inflation expectations anchored at 2%. The aspiration is that this policy might yield an average inflation rate of 2% over some time. Even if it’s only an aspiration, and despite policy only differing under FAIT during and after episodes at the ELB, the new framework is still more likely to achieve an average inflation rate of 2% than the earlier framework —via the direct effect of pursuing an overshoot and also via the indirect effect of raising inflation expectations and hopefully lessening the undershoot at the ELB.
But let’s let FOMC participants, and the official statements about the new framework, define the role of AIT in FAIT. I start with Clarida, given that he is the architect and most detailed expositor of the new framework. And the framework was approved with unanimous consent. He has given the most significant speeches on the new framework, most recently on Wednesday. (Both Powell and Clarida spoke on Wednesday, and they essentially stuck to the same scripts they’ve been using recently.)
But Clarida speaks for himself, not the whole Committee, and he’s been careful to point out where his views are his personal interpretation or preference. So I will also consider whether other FOMC participants hold differing views.
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