Is the Fed committed to average inflation targeting?
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?
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?