The Fate of FAIT: Salvaging the Fed’s Framework

33 Pages Posted: 14 Jun 2022

See all articles by David Beckworth

David Beckworth

Mercatus Center at George Mason University

Patrick Horan

Independent

Date Written: June 7, 2022

Abstract

The Federal Reserve’s transition to a flexible average inflation targeting or FAIT framework in 2020 has come under intense scrutiny given its failure to prevent the inflation surge of 2021 and 2022. This paper shows that these developments are the result of both a public misunderstanding about how FAIT works and the challenges created by the asymmetric design of the framework. As a result, some observers have called on the Federal Reserve to abandon FAIT and return to its previous framework. This paper, however, argues that FAIT should not be abandoned, but improved upon by applying symmetry to its makeup policy and treatment of supply shocks. Doing so gives FAIT the properties of a Nominal GDP level target and turns it into a framework that follows the spirit of Woodford (2013) and Hetzel (2020). This paper calls this proposed framework FAIT-N and shows how to operationalize it using a measure called the NGDP Gap.

Keywords: Federal Reserve, monetary policy, inflation, flexible average inflation targeting

JEL Classification: E5, E52, E58

Suggested Citation

Beckworth, David and Horan, Patrick, The Fate of FAIT: Salvaging the Fed’s Framework (June 7, 2022). Available at SSRN: https://ssrn.com/abstract=4130647 or http://dx.doi.org/10.2139/ssrn.4130647

David Beckworth (Contact Author)

Mercatus Center at George Mason University ( email )

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Patrick Horan

Independent

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