The language of the Federal Reserve's inflation target 

Abstract

We study the Fed’s communication of its inflation target and how it has evolved since their adoption of an average inflation targeting (AIT) framework in 2020. We find that when inflation became elevated, the Fed shifted away from language referencing the objective as an “average over time.” This likely reflects an asymmetric AIT regime but highlights the communication challenges of a regime where the goals change over time. Leveraging the timing of this shift suggests that the Fed uses an implicit averaging window of 3-5 years. We also find that the Fed shifted away from referencing a “longer-run” goal, despite this remaining the official objective. This language was replaced with more frequent references to a simple “2 percent goal,” but also with more frequent use of ambiguous language like “over time” and “sustainably”, which could be interpreted in different ways. We complement these results with an online survey to gauge how the public interprets different versions of inflation target language and to assess the clarity of this different language. We also assess whether different target language engenders different expectations about the future path of inflation. 

Keywords: inflation, Federal Reserve, language, communication, monetary policy

JEL Classification: E31, E52, E58