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Why Yes, The FOMC Would Like Some Inflation Overshoot Now

David Beckworth profile picture
David Beckworth

The Fed claims it has a symmetric inflation target. From its 2017 and 2018 Statements on Longer Run Goals and Monetary Policy, the FOMC states:

The Committee reaffirms its judgment that inflation at the rate of 2 percent... is most consistent over the longer run with the Federal Reserve's statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored...

Numerous Fed officials have repeated this point as well. They too see the inflation target as a symmetric one, an understanding that allows for an occasional inflation overshoot. Despite these claims, however, the Fed has persistently undershot its inflation target. If one acknowledges the Fed implicitly targeted 2 percent long before the explicit target was adopted in 2012, then the undershooting has lasted for almost a decade. This is not a pretty picture.

Many observers, including myself, have taken this as evidence that the Fed's 2 percent target is more of a ceiling and not symmetric. This understanding has been borne out by the FOMC's own Summary of Economic Projections (SEP) forecasts for core PCE. Recall the definition of the SEP:

Each participant's projections are based on his or her assessment of appropriate monetary policy.

So the SEP reveals FOMC members' forecasts conditional on the Fed doing monetary policy right. And for the longest time, doing monetary policy right was not overshooting 2 percent inflation in the next year, as seen in the figure below. It is hard to square these revealed preferences from the SEP with a symmetric inflation target. This is a point Narayana Kocherlakota has made many times and has been a source of frustration for many Fed watchers. Ryan Avent of The Economist

This article was written by

David Beckworth profile picture
David Beckworth is an assistant professor of economics at Texas State University. He is the author of Macro and Other Market Musings.

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