This Thursday marked the culmination of a year and half long policy framework review by the Federal Reserve.  And the results can be summed up pretty quickly. In this case, three letters suffice: “AIT” or Average Inflation Targeting. 

Under its newly announced policy framework, the Fed will explicitly aim to achieve average inflation of 2%. And, most importantly, if inflation has persistently undershot 2%, the Fed will “likely aim to achieve inflation moderately above 2 percent for some time”. I guess the Fed doesn’t like to box itself in with its language.

What does this mean from a policy perspective?

A cynic would say this means the Fed got it wrong. Despite PCE inflation barely inching above the 2% mark in the 2010’s, the Fed raised rat es nine times in the 2015-2018 period only to start cutting six months later in July 2019…and then really start cutting in February of this year. But hey, maybe even the Fed should get a pass when it comes to global pandemics. 

An optimist would say that this is a step in the right direction. With the new policy in place, expect the Fed to think twice before raising rates, even in a very tight labor market. I wouldn’t go so far as to say that the Fed has declared the Phillip’s Curve, (or the inhere...

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