Tempting FAIT: Flexible Average Inflation Targeting and the Post-COVID U.S. Inflation Surge
Abstract: In August 2020, the Federal Reserve adopted Flexible Average Inflation Targeting (FAIT), permitting inflation to temporarily exceed the 2% target. Using synthetic control methods, we estimate that FAIT raised headline CPI inflation by 1 percentage point and core CPI by 0.5 percentage points, relative to a no-FAIT-adoption counterfactual, with short-lived effects concentrated during the 2021 inflation surge. Short-term inflation expectations increased by 0.8 percentage points, while long-term expectations remained well anchored. Real economic effects were statistically insignificant. The combination of a moderate and transitory inflationary impact, well-anchored long-term expectations and muted real effects is suggestive of monetary policy operating in a steeper post-pandemic Phillips-curve environment in the New Keynesian model. These findings are robust to alternative specifications, including controls for global and fiscal conditions.
DOI: https://doi.org/10.24149/wp2511r1