Has the Federal Reserve abandoned the inflation-averaging target framework it adopted in 2020 and, in doing so, "unofficially" moved the goalpost and is willing to accept a higher inflation rate? No one at the Fed has publically addressed this issue. Still, a WSJ article of August 22, "How Hard Should the Fed Squeeze To Reach 2% Inflation," suggests that many policymakers may be unwilling to use the official rate to lower inflation further, given the broad economic consequences that may come with it, but let it "hopefully" drift down instead.
The Federal Reserve updated its longer-range goals and monetary policy in August 2020. At that time, policymakers adopted an inflation-averaging framework. Three years ago, at the Federal Reserve Bank of Kansas City Jackson Hole Conference, Fed Chair Powell stated that the new framework means, "we will seek to achieve inflation that averages 2 percent over time". At the time of the adoption of the new framework, inflation was running consistently below the 2% target, so Powell stated that if inflation ran below 2% during downturns, it would be willing to accept higher inflation during the recovery to achieve an inflation rate that averages 2% over time.
Powell speaks again at the Jackson Hole conference this week and confronts a core inflation rate averaging 4.9% for the past three years. Will Powell restate the inflation-averaging framework or walk away from it? A credible monetary policy framework has to be consistent on both sides of the inflation target, easing or keeping policy rates low when inflation is too low and tightening or maintaining high policy rates when inflation is too high.
Could long-bond yields have been rising of late because there is a growing sense of concern among investors that the inflation-averaging framework is not symmetrical? In other words, policymakers will use the framework when inflation is below target but not when it runs above the 2% target.