The Fed abandons average inflation targeting

The Fed abandons average inflation targeting 1

Of course they won’t admit to this fact, but these projections make a mockery of the Fed’s commitment that inflation will average 2% over the longer run:

The Fed abandons average inflation targeting 2

The Fed is not supposed to raise its projection for the average inflation rate during the 2020s; it should adjust monetary policy so that its inflation forecast for the 2020s does not increase.

Some might point to the “flexible” part of “flexible average inflation targeting”, which presumably refers to the fact that the Fed doesn’t just care about inflation, they also care about real GDP growth.  But the Fed just raised its implicit estimate of NGDP growth in 2022 from roughly 6.6% to over 7%, which is wildly inconsistent with the Fed’s dual mandate.  NGDP is already well above the pre-Covid trend line.  The economy is overheating and the Fed is about to pour more gasoline on the fire.

St Louis Fed President James Bullard is right; the Fed should have raised rates by 0.5%.  But the bigger mistakes were made late last year, when the Fed allowed excessive NGDP growth and refused to commit to pushing inflation below 2% after a period of above 2% inflation.

Just as in late 2008, this is a mistake happening in broad daylight.  There is no excuse.

 

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