Politico has a piece showing how the recent inflationary surge has discredited the run the economy hot approach to monetary policy. Good riddance.
But let’s not throw out the baby with the bathwater. The recent policy errors were not due to FAIT, indeed this never would have happened if we had actually targeted the average inflation rate. So here’s my proposal (which is pretty similar to the way Jim Bullard interpreted FAIT back in 2020):
Each decade have the Fed estimate the trend rate of RGDP growth in the US. Then set an NGDP level target at 2% plus trend RGDP growth for the following 10 years.
Under this regime, the rate of inflation will average about 2% in the long run. But it’s also “flexible”, allowing for some year-to-year fluctuation in inflation due to supply shocks.
Of course I still think simple NGDPLT is better, especially if done on a per capita basis. But this proposal is 98% as effective and would not require a humiliating retreat by the Fed. They could claim they are sticking with their 2% FAIT policy, albeit with a slightly different interpretation.
PS. George Selgin has a good twitter thread on the Politico piece.
PPS. David Beckworth has a nice graph showing how the Covid inflation has gradually morphed from being a supply problem to a demand problem:
