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The Fed inflation targeting policy success


Since 1996 The Fed has defined “price stability” as inflation at 2 percent. It has been the official policy goal since 2012. Fed has targeted 2 percent inflation but inflation expectations have continued to remain below the Fed’s 2 percent target.

In November 2020 the Fed updated their 2012 monetary policy strategy into 2 percent average inflation targeting: 2020 Statement on Longer-Run Goals and Monetary Policy Strategy

Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

Background reasoning for inflation targeting in general and for this policy change to average inflation targeting:

  1. FAQ: Why does the Federal Reserve aim for inflation of 2 percent over the longer run?
  2. The FRED® Blog: From inflation targeting to average inflation targeting The Fed’s new long-run monetary framework
  3. Jerome Powell's Jackson Hole speech, August 27, 2020 New Economic Challenges and the Fed's Monetary Policy Review.
  4. Rethinking the Fed’s 2 percent inflation target 2018 Report from the Hutchins Center on Fiscal & Monetary Policy at Brookings with contributions from Lawrence H. Summers, David Wessel, and John David Murray.
  5. Brookings Institution:What do changes in the Fed’s longer-run goals and monetary strategy statement mean?
  6. Brookings Institution:What is “average inflation targeting”?

Note: The FOMC’s inflation measure is the core personal consumption expenditures index (core PCE), Personal Consumption Expenditures Excluding Food and Energy. Total PCE is too volatile and subject to idiosyncratic shocks for FOMC to use.

Will the U.S Federal Reserve achieve its new average inflation targeting policy goal?

For this question the longer-run inflation is 4 years, starting when the policy changed.

This question resolves postive if the annualized core-PCE inflation is between 1.9 - 2.5 percent between 2020-11 and 2023-11.

Exactly: 2023-11 Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) (PCEPILFE) is up between 7.8 and 10.4 percent (inclusive) relative to 2020-11 value.

The data source used to resolve the question: U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis;

Normal rounding half up of decimals is used to get tenths (1/10) accuracy.

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