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Target the forecast

Summary:
The Fed is targeting inflation at above 2% in future years, in order to create an average inflation rate of 2%. The Fed is predicting inflation will be at or below 2% in future years. The Fed needs to change policy until the forecast for inflation is equal to the target for inflation.I’ll probably add some updates later today. Update: Here’s what reporters should have asked Powell: “Mr. Chairman. You’ve just said that the Fed is definitely not out of ammo. What would be the downside of boosting asset purchases above the current 0 billion/month with the goal of getting to 2% inflation sooner, and having labor markets recover faster? You’ve said that current policy is appropriate, but what specific bad outcome do you fear would occur with bigger asset purchases

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The Fed is targeting inflation at above 2% in future years, in order to create an average inflation rate of 2%. The Fed is predicting inflation will be at or below 2% in future years. The Fed needs to change policy until the forecast for inflation is equal to the target for inflation.

I’ll probably add some updates later today.

Update: Here’s what reporters should have asked Powell:

“Mr. Chairman. You’ve just said that the Fed is definitely not out of ammo. What would be the downside of boosting asset purchases above the current $120 billion/month with the goal of getting to 2% inflation sooner, and having labor markets recover faster? You’ve said that current policy is appropriate, but what specific bad outcome do you fear would occur with bigger asset purchases that led the Fed to avoid adopting a more expansionary policy today?”


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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