A reader Objection to mine postal Shows year-over-year and real-time core PCE deflators against the 2% target, and notes (correctly) that as of 2020, the Fed's new monetary strategy incorporates a flexible average inflation target (FAIT). Although I may have missed it, I don't remember how FAIT is supposed to operate based on the chart and trendline regression rates.Readers are not giving guidance, just criticism, so I will update my content release forward.
Figure 1 shows the actual PCE deflator (note that the Fed officially focuses on the PCE deflator, not the specific core PCE deflator).
figure 1: PCE deflator (black), FAIT trend as of August 2020 (tan) and trend as of January 2012 (blue), and inflation target as of January 2024 (red line). The arrow indicates what path the price deflator should take if the regression is to be completed by December 2026. NBER-defined recession peak-to-trough dates are shown in gray. Source: BEA, NBER, and author's calculations.
Note that in order to reach the FAIT trend by the end of 2026, the Fed will need to be deflationary (about 0.8% per year) from the date of the new monetary strategy.Catering to the FAIT trend started in January 2012 (when Jeffry Frieden and I were arguing There is now conditional inflation), the inflation rate must be slightly lower than 1.5% in the next three years. I haven't seen anyone come up with these types of numbers. Of course, if the target date is pushed back further, to around 2040, the amount of deflation or deflation required, respectively, will change.
So I must admit that I am a little confused by readers' criticism of plotting ex post PCE inflation against the 2% trend, as most FOMC members seem to be talking about inflation targeting as we have known it in the past, rather than FAIT.
