The Fed Gets Its Inflation Target

by: Felix Salmon

In the Fed's latest move towards greater transparency, we will now see three-year forecasts for both core and headline inflation four times a year. Greg Ip notes that this is an inflation target in all but name:

The projection for inflation at the end of the forecasts can serve as an informal inflation target. That’s because the forecast is based on “appropriate” monetary policy and three years is usually long enough for the Fed to get inflation to where it wants it.

And so I will make a prediction, in the form of a formula:


Where I is the Fed's de facto inflation target, C is the most recent 3-year core inflation forecast, H is the most recent 3-year headline inflation forecast, c is the previous 3-year core inflation forecast, and h is the previous 3-year headline inflation forecast.

Every so often, this equality will not hold, and those will be interesting times. But I have a feeling that most of the time it will be true.