Symmetry Means “On Average”: Welcoming A Modest Overshoot of 2%

We said some time ago that we would hear the word “symmetric” many, many times as the likelihood of inflation overshooting the 2% objective increased and as policymakers began to project such an overshoot explicitly. “Symmetric” is intended to convey how monetary policy would respond. But FOMC participants’  definitions of symmetry are evolving in important ways. First, there’s the one that is frankly totally  uninformative, telling us what we already know: “The Committee would be concerned if inflation were running  persistently above or below [its] objective.” But the phrase “on average” is now frequently included when there is a reference to the asymmetric objective. Policymakers are moving toward a definition of price stability as  “2% on average”—and perhaps some have already done so. If so, they should not merely tolerate a modest overshoot of 2% inflation, they should welcome it after being below 2% for a long period. The FOMC is laying out the welcome mat. 

“Symmetric” in the Statement on Longer-Run Goals and Monetary Policy Strategy 

The first—and so far only—material change to the FOMC’s Statement on Longer-Run Goals and Monetary  Policy Strategy was to attach the word “symmetric” to the phrase “inflation goal” (January 2016).  Policymakers presented this amendment as merely making explicit what the strategy has always been: “The  Committee would be concerned if inflation were running persistently above or below” its 2 percent objective.”  But, in my view, it was clearly a communication effort to get out in front should the highly accommodative monetary policy threaten an overshoot of the 2% objective.  

Symmetric in the FOMC Postmeeting Statement 

The FOMC first added the word “symmetric” to its post-meeting statement in March 2017: “The Committee  will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.”  That was before the slowdown in inflation that was revealed over the next several months, and at that point,  inflation had risen to close to the 2% objective. The minutes revealed some concern among members about  that objective being seen as a ceiling, and “Several members observed that an explicit recognition in the  statement that the Committee’s inflation goal was symmetric could help support inflation expectations at a  level consistent with that goal.” 

A little more than a year later, inflation is once more close to its objective and again the focus is on how the  FOMC will respond to the prospect of inflation moving above 2%. The emphasis strengthened when the May  2018 FOMC statement added “symmetric” to a forward-looking sentence on the inflation outlook. The message was: “We are communicating with you about our reaction function. Do you get it?” 

Symmetry: Sometimes Above and Sometimes Below 

A quick Google search brings up a common interpretation of a symmetric inflation objective: “Asymmetrical  inflation target is a requirement placed on a central bank to respond when inflation is too low as well as when  inflation is too high.” For some time, FOMC members have used that definition when they have talked about asymmetric inflation objectives. But we know that. Indeed, we have known that since at least July 1996— 

my first FOMC meeting—when I told the Chairman that “inflation can be too low as well as too high,” a  statement with which Janet Yellen agreed, along with probably all other FOMC participants, perhaps with the  

exception of Greenspan. In any case, here is the usage of the term symmetric by Chairman Powell and  Presidents Evans and Bostic: 

What we’ve said in the longer-run statement of goals and monetary policy strategy is that we would be concerned with sustained or persistent deviations of inflation either above or below. We’ve also said—in minutes and in speeches and things like that—that that is asymmetric objective. (Powell,  March 21 Press Conference) 

I do think that to the extent that inflation continues to move towards 2 percent — it can go above 2  percent, 2.25 percent, completely consistent with symmetry for our price objective — as we move the fund’s rate more toward neutral, and then we see how far we have to go beyond that. (Evans,  April 17) 

I am comfortable with some degree of overshooting the 2% target. (Bostic, May 7) Symmetry Means “On Average” 

Symmetric is now often being linked with “on average.” That is, the price stability objective is already being reinterpreted by some as 2% on average, not just 2%. In this case, the Committee would likely welcome inflation above 2% for some time to balance out the period over which inflation has persistently been below  2%. Inflation might average 2%. After all, if the FOMC acts as though 2% is a ceiling, inflation will likely average below 2% in practice. 

For example (bolding our emphasis): 

I am personally comfortable with the fact that inflation may overshoot that 2 percent for a  while…From the beginning we’ve seen our inflation target as being an asymmetric one where we want inflation to be on average around 2 percent, sometimes above, sometimes below…Given that inflation’s been below our target for several years, I think it is important to reinforce that message that we think of 2 percent as the mid-point where we expect inflation to be. (Williams, May 4) 

Being a little above 2 percent after being below 2 percent for many, many years is not a  problem…[symmetric is] a signal to say that inflation will sometimes be above, sometimes below, but on average at 2 percent. (Dudley, May 4) 

Price Level Targeting: A Commitment to Average 2% 

This is beginning to sound like price level targeting, which is a commitment to average 2% inflation. For any period during which inflation is below 2%, the Committee would commit to being above 2% for some time so that, over the whole period, inflation averages 2%.  

One could argue that an objective of 2% on average, rather than 2% at a point in time, is a better definition of price stability. But there is so much interest today in price level targeting (and its cousin, nominal income targeting) because the neutral rate is currently very low, and that means that the zero lower bound will constrain the FOMC more often. As a result, the FOMC would like to have more policy options at the zero bound. Price level targeting is, in effect, a commitment to lower for longer, maintaining a very low funds rate for longer than would be the case for a traditional inflation objective, which would, in turn, lower longer-term yields and provide stimulus, even if the fund’s rate can not be lowered any more. 

Why Not? 

Although price-level targeting is advertised as a commitment, it might not be fully credible. If inflation were below 2% for some time, targeting an inflation rate above 2% to bring the average to 2% might have some credibility because the period below 2% would presumably be associated with a lower unemployment rate for longer. However, suppose we’re starting with inflation above 2% and consider the implication of a  commitment to a 2% average over time. Given the flat Phillips curve, returning to 2% might require a severe 

or very long recession to raise the unemployment rate up to—and perhaps above—the NAIRU. It is not credible that the FOMC would be willing to do that. 

Symmetry: Poor Man’s Price Level Targeting 

Asymmetric inflation objective offers the same logic of price-level targeting, without the cost of reduced credibility. It too calls for “lower for longer” than if the Committee wanted to raise inflation only to the objective and no higher. Symmetry would not have as powerful an effect on market expectations, and hence long-term rates, as would the commitment in price level targeting. But we appreciate that “forward guidance”  can be effective as well. Defining a symmetric objective as an objective of 2% on average, combined with an appropriate narrative would add to the effectiveness of monetary policy at the zero bound. But it would also be preferred to the traditional inflation objective in more normal times, like today! 

The Message Today 

Here is how we interpret the policy message today, or perhaps the emerging policy message: “The FOMC  understands that inflation will likely soon overshoot the 2% objective, but it is important to understand that  2% is not interpreted as a ceiling. Rather it should be thought of as the midpoint of some acceptable (but, as  yet, unstated) range above and below 2%.” Our interpretation is that the FOMC will set the policy to try to maintain inflation within that range—perhaps 2% to 2½%—rather than try to strictly enforce a 2% objective.  That means a less steep tightening and more caution about raising the fund’s rate much above its neutral level. That trades a little higher inflation for a lower probability of recession.  

Watch What They Do, Not Just What They Say 

Clearly, a symmetric inflation objective does not preclude the Committee from going “faster and further” in response to growth being projected to be way above trend, a continuing decline in the unemployment rate to a historically low level, and building inflation pressures, now including a likely overshoot of the 2% objective. Of course, it would, and indeed it has. It just means a less aggressive approach than would be appropriate if it really wanted to strictly enforce the 2% objective over the next couple of years. 

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