by Nicolás Cachanosky
The American Institute for Economic Research
The Fed has announced a major change on its policy regime. The Fed abandoned a 2 percent inflation target in favor of a 2 percent average inflation target (AIT). The former policy treated the 2 percent more as a ceiling than as a target to hit. The new policy changes this, and treats the 2 percent inflation as a target to hit on average.
The new average inflation targeting policy regime is intended to help with a credibility issue. The former inflation targeting policy regime prevented the Fed from anchoring long-run inflation expectations at its preferred two percent. The new policy regime may not do much to anchor short-run inflation expectations, but it is expected to anchor long-run expectations more effectively.