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No faith in FAIT?

Summary:
James Pethokoukis recently tweeted a Goldman Sachs forecast for growth, employment and inflation. This caught my eye: That forecast is not consistent with the “Fed’s goal under its new framework”, at least according to my understanding of the framework. To achieve a 2% average inflation rate for the 2020s, the Fed would need to bring inflation down below 2% in future years, in order to offset the above 2% inflation of the past few years. Of course not all policy failures are equal. If Goldman Sachs is correct, the Fed will still have done far better than during the Great Recession. A modest miss on the upside is far better than a miss on the downside. But “good enough” should not be the goal. The Fed should try to do the very best it can. I will be very

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James Pethokoukis recently tweeted a Goldman Sachs forecast for growth, employment and inflation. This caught my eye:

No faith in FAIT?

That forecast is not consistent with the “Fed’s goal under its new framework”, at least according to my understanding of the framework. To achieve a 2% average inflation rate for the 2020s, the Fed would need to bring inflation down below 2% in future years, in order to offset the above 2% inflation of the past few years.

Of course not all policy failures are equal. If Goldman Sachs is correct, the Fed will still have done far better than during the Great Recession. A modest miss on the upside is far better than a miss on the downside. But “good enough” should not be the goal. The Fed should try to do the very best it can. I will be very interested in seeing the next set of Fed forecasts for inflation. If they are serious about FAIT then the forecast for inflation in 2023 should be below 2%. Unfortunately, I don’t expect that to occur.


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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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