Working Paper

Tempting FAIT: Flexible Average Inflation Targeting and the Post-COVID U.S. Inflation Surge

Abstract: In August 2020, the Federal Reserve replaced Flexible Inflation Targeting (FIT) with Flexible Average Inflation Targeting (FAIT), introducing make-up strategies that allow inflation to temporarily exceed the 2% target. Using a synthetic control approach, we estimate that FAIT raised CPI inflation by about 1 percentage point and core CPI inflation by 0.5 percentage points, suggesting a moderate impact net of food and energy and a largely temporary effect. Short- to medium-term inflation expectations increased by approximately 0.8 percentage points, while long-term expectations remained anchored. The effects of FAIT on economic activity were, if anything, minimal. Our results are robust across multiple specifications, including alternative price indices, synthetic control estimators, control groups and adjustments for global supply chain pressures, economic activity, fiscal policy, commodity prices, interest rates and monetary aggregates. The differing macroeconomic outcomes under FAIT versus a counterfactual FIT characterized by moderate inflationary effects, negligible real effects and anchored long-term expectations, are consistent with the hypothesis of a steeper-than-expected post-pandemic Phillips curve in the New Keynesian model.

JEL Classification: C32; C54; E52; E58; E61; E65;

https://doi.org/10.24149/wp2511

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2025-04-09

Number: 2511