I am getting increasingly annoyed by all of the discussion of whether the Fed will succeed in getting inflation back to 2%. That should not be the Fed’s goal.

In 2020, the Fed instituted a policy of “flexible average inflation targeting”. Unfortunately, the exact nature of that policy is somewhat ambiguous, but under no reasonable interpretation could “getting back to 2% inflation” be viewed as consistent with FAIT. Inflation is currently running far above 2%, and is expected to continue to exceed that rate for at least the first half of 2022. If FAIT is to mean anything, the Fed needs to shoot for an inflation rate well under 2% during the mid-2020s.

Now you might argue that pushing inflation down to say 1.6% is not consistent with full employment. I doubt that. In the late 2010s, we had the lowest unemployment in 50 years and PCE inflation ran slightly 2%.

But given the fact that the Fed adopted a 2% average inflation target, they should try to hit that target. If Jay Powell doesn’t believe that low inflation in the mid-2020s is consistent with full employment, then the Fed never should have adopted FAIT in the first place. Instead, they should have adopted something like NGDP level targeting. Unfortunately, the Fed went in a different direction, and so now it needs to establish credibility by hitting its target.

The term “transitory” can have one of several meanings.  Under ordinary inflation targeting, transitory inflation means an inflation rate temporarily above 2%, before reverting back to 2%.  But under average inflation targeting, transitory inflation requires a period of above 2% inflation be followed by a period of below 2% inflation. 

The TIPS markets seem to be forecasting above 2% inflation over the next 10 years.  That’s bad news for Powell.  Monetary policy is currently too expansionary.