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MNI INTERVIEW: Fed's Average Inflation Target Loses Its Luster

University of Oxford economist Michael McMahon discusses the Fed's policy framework.

The Federal Reserve's average inflation targeting regime has proven to be more difficult to communicate and less beneficial in practice than in theory, University of Oxford economist Michael McMahon told MNI, urging the Fed to revise its framework to focus less on episodes of below-target inflation and better communicate its reaction function under different scenarios.

Flexible average inflation targeting, adopted in 2020 after an 18-month-long review of the policymaking framework, calls for a deliberate overshoot of the inflation target after a period of undershooting so that inflation "averages 2% over time." The Fed will begin a fresh review of its framework later this year.

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The Federal Reserve's average inflation targeting regime has proven to be more difficult to communicate and less beneficial in practice than in theory, University of Oxford economist Michael McMahon told MNI, urging the Fed to revise its framework to focus less on episodes of below-target inflation and better communicate its reaction function under different scenarios.

Flexible average inflation targeting, adopted in 2020 after an 18-month-long review of the policymaking framework, calls for a deliberate overshoot of the inflation target after a period of undershooting so that inflation "averages 2% over time." The Fed will begin a fresh review of its framework later this year.

Keep reading...Show less