At today’s press conference, a reporter asked Fed chair Powell this question:
Do you want to go below 2%, so that on average you get a 2% inflation rate?
Powell responded:
So no, there’s nothing in our framework about having inflation run below 2%. That we would do that. That we would try to achieve that outcome. So the answer is no.
What?!?!? On the face of it, Powell just repudiated the Fed’s new 2% flexible average inflation targeting (FAIT) regime.
Then he contradicted himself:
What we are trying to do is to keep inflation expectations well anchored at 2%. That’s always the ultimate goal. We get to that goal by having inflation average 2% over time. And if inflation doesn’t average 2% over time, then it’s not clear why inflation expectations would be anchored at 2%.
If the Fed is serious about targeting the average inflation rate, then periods of above average inflation must be offset by periods of lower than average inflation. That’s simple math.
You might argue that Powell simply misspoke. But recent inflation projections from the Fed (assuming “appropriate monetary policy“) foresee inflation not falling below 2% at any time. So I doubt that Powell misspoke. In any case, his answer was incoherent, which cannot be helpful when trying to build Fed credibility.
Another possibility is that the Fed never intended to adopt average inflation targeting, and actually intends to implement something like Ben Bernanke’s proposal for temporary price level targeting (TPLT). That would justify the Fed’s plan to bring inflation back to 2%. But if TPLT is the actual policy, and not FAIT, then I wish they had told us.
Most of all, I am disappointed that reporters did not follow up on this issue and ask Powell to explain the contradiction. Is the Fed committed to FAIT? If so, doesn’t that require lower than 2% inflation on occasion to offset a period of very high inflation? So why does he suggest that they would never do that? And why no follow up questions?
READER COMMENTS
MarkLouis
Jan 26 2022 at 7:48pm
He almost seemed not to understand how averages work. It was one of the least impressive performances I’ve ever seen from a Fed chair.
Kevin
Jan 26 2022 at 9:59pm
Is it too cynical to suggest that potentially ignoring FAIT is meant to accommodate the federal government and financial institutions in their abilities to service debt?
MarkLouis
Jan 27 2022 at 7:49am
Problem is a majority of Federal obligations are essentially linked to inflation: healthcare, social security, TIPS, military spending, etc.
Mark Brophy
Jan 26 2022 at 10:05pm
Powell knew that it was a silly question. Inflation will never come anywhere near 2%. It will be a miracle for the CPI to fall to less than 7%.
Michael
Jan 28 2022 at 8:13am
There’s no data-driven reason to believe that. Were it widely believed, markets would be freaking out in a way that they are not.
Tim Rowe
Jan 26 2022 at 10:34pm
I was similarly shocked by that segment of the press conference. My read is that the FOMC is back to targeting inflation of 2.0% based on forecasts (one-year ahead) and is ignoring past data.
FAIT was intended to raise inflation expectations to end the persistent undershoot of the 2% PCE target (and perhaps deflect attention from the 2017-2018 policy mistake). When designing the new framework, the FOMC apparently did not consider an inflationary shock scenario and its implications for the dual mandate. I suspect most on the FOMC realize now that while a switch to FAIT may have made since in the late 2010s, Q3 of 2020 was about the absolute worst time to switch.
Scott Sumner
Jan 27 2022 at 1:59pm
I do think that FAIT helped promote a fast recovery, and hence was a good idea, I just think they should have stuck to the policy. They were rumored to be starting the clock from the end of 2019.
Lizard Man
Jan 27 2022 at 12:16am
Given how the Fed has been acting recently, is this a surprise? If they wanted to bring down inflation to the point where it averages about 2% over the decade, they would have done that already. My guess is that they are afraid that tightening too much right now could cause a recession; also that they want to err on the side of too much NGDP growth in the face of potential supply shocks from the pandemic. I am not so sure that easing of the acute phase of the pandemic will really bring down inflation all that much, but I think that the Fed is hoping to see a big boost in supply sometime in the near future, turning NGDP growth into higher RGDP growth and lower inflation.
Christophe Biocca
Jan 27 2022 at 7:46am
IIRC they never specified how they compute the average or the time horizon. So maybe they’re using a Hölder mean with p approaching negative infinity. So all they have to do is hit 2% once in their time horizon and they’re set.
Of course if they did pick that, it would be impossible for them to ever fix an inflation undershoot within any time period.
Mark Louis
Jan 27 2022 at 7:55am
Of course they would never give us an exact target. But here’s a quote from an FT article about how many of them viewed the parameters. Most favor a 4-6 year window.
“President of the Federal Reserve Bank of Atlanta Rafael Bostic Consider four to eight-year moving averages for various inflation indicators. His counterpart at the Cleveland Fed, Loretta Meister, Referring to the five-, six-, or seven-year moving average of PCE inflation, or even a fixed starting point instead of a moving average. Chairman of the Federal Reserve Bank of St. Louis James Brad Think that the five-year window period is realistic, and Charles Evans The Chicago Fed’s report mentions an asymmetric five-year average, which does not require corrections for past inflation targets.”
marcus nunes
Jan 27 2022 at 7:58am
I always thought the move to FAITH was a misguided one, prone to cause problems!
https://marcusnunes.substack.com/p/is-the-new-monetary-policy-framework
and this can be seen as an appendix or better update/
https://marcusnunes.substack.com/p/an-inflation-chart-book
Michael Rulle
Jan 27 2022 at 9:23am
I was watching live when Powell said that——and was definitely shocked—-as he was actually “correcting” the questioner’s assertion that FAIT was his stated policy. As others have commented, myself included, there does not seem an obvious way to implement the FAIT policy in any systematic fashion.
Scott may have a much more clear idea of how this can work—-and be a positive for optimal monetary policy. In his other blog he states that successful inflation targeting is not inflationary—-which is true by definition. That would be true with FAIT too—-but it has occurred to me that Powell has not instituted concept of “interim” inflation targeting when inflation needs to be below or above 2.
That is confusing to me. He managed to have the market drop 3% at one point——I assumed it was because he did not commit to a rate hike in March—-just a strong “lean”—-but all in I was extremely disappointed.
MikeDC
Jan 27 2022 at 1:48pm
It’s absurd that you are more disappointed in a bunch of reporters, who may or may not even know much about economics than you are with Powell, who’s the single most important economic decision-maker on the planet. If he can’t get his story straight, neither will reporters. And more concerning, the downside of him not getting his story straight is a market crash, whereas the downside of a reporter not asking a follow-up question is … nothing.
In the government field I work in, there’s an inflation parameter that hasn’t changed for a good 10 years. Every year they just change the years on the table to show that next year, inflation is expected to be 2%. Just like Samuelson famously changed the years on his graph showing how the USSR would catch up to the US. Unlike Samuelson’s textbooks, these tables have the force of law when it comes some government planning. In this respect, it helps “anchor” expectations at 2% even though there’s no history of showing 2% is a reasonable guess.
Scott Sumner
Jan 27 2022 at 2:02pm
“It’s absurd that you are more disappointed in a bunch of reporters, who may or may not even know much about economics than you are with Powell”
These are not average reporters, they are reporters that specialize in monetary policy. They certainly understand how AIT is supposed to work.
MikeDC
Jan 27 2022 at 3:28pm
Again… 1) should they know it as well as Powell? and 2) whose ignorance poses a greater risk?
In both cases it’s Powell and it’s not even close.
Further, they whole point of press conferences generally for the reporters to get a quotable by getting the guy doing the speaking to mess up. If the guy messes up on his own, asking the follow up takes away the “news story”.
As a listener, once this “news story” has been brought into existence, you can either conclude “this mess up is because the speaker has an unsound grasp of what he’s talking about and that’s terrible!” or “this is a complicated subject and even the best at the subject can misspeak”. Or anywhere in between. It might even be reasonable to think “If the fate of the economy rests on the expectations generated by a guy’s delivery at a press conference, we’re doing it wrong”.
Enough with the performative theater.
Scott Sumner
Jan 28 2022 at 12:44am
Both should fully understand the concept of an “average”. As far as being more disappointed by the press, I don’t expect much from political figures. I do have higher expectations for the press.
Michael
Jan 28 2022 at 8:19am
Would Powell’s remarks be consistent with his trying to avoid a specific near term commitment to cut inflation below 2% while the real economy is still sorting itself out due to the continuing (and continually evolving) impact of Covid?
It doesn’t seem crazy to me for a Fed chair to both 1) want 2% average inflation target and 2) not want to drive inflation below 2% until the the pandemic has gone endemic and more stable.
Of course, Powell did not say that.
Scott Sumner
Jan 28 2022 at 1:41pm
Whatever he intended, it was not an impressive answer.
Jeff
Feb 2 2022 at 2:02pm
Yesterday, in response to an interviewer’s question about the averaging window for the AIT, Mary Daly said:
“In the past decade, when inflation ran below its, our two percent target for a decade, well, that was clearly an average that we never achieved….But if you went back and looked over a year, there were many times where we had achieved the two percent, over that decade. But that’s not the same as sustainable price stability, that’s just episodic, good-fortune on price stability. So, obviously, too short a period leaves you wanting in a, especially in the past expansion, when we really struggled to get it up to two percent consistently. Today, we’re in a completely different situation. You could pretty much use any averaging period you could consider, and you would find that we have achieved our two-percent averaging.”
Unfortunately, the interviewer moved on and there was no follow-up question.
It is quite difficult to parse this kind of language, particularly the last sentence. It seems to only make sense if you make the following substitutions:
“price stability” means at least two percent annual price growth
“two percent average inflation target” means at least two percent annual price growth over a given averaging window
Are we to understand that the Fed now sees it’s stable prices mandate primarily as a charge to promote rather than tame inflation? What other interpretation is there?
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