A Simple Evaluation of Two Decades of Inflation Targeting: Lessons for the New Monetary Policy Strategy

Abstract

either implicitly or explicitly had an annual inflation target (IT) of around 2 percent. The Federal Reserve Open Market Committee’s (FOMC’s) preferred inflation measure to meet this target is core personal consumption expenditures (PCE), which explicitly excludes the prices on food and fuel to mitigate short-term volatility in the index. There has been a debate about using the core measure of inflation instead of the headline measure, which includes all PCE categories,1 but for the purpose of this analysis we focus primarily on the core measure. In addition to its target inflation rate, the Fed seeks to achieve “full employment” or the lowest level of unemployment possible. The combination of its inflation and employment mandates is known as the Fed’s “dual mandate.” In August 2020 at the Jackson Hole conference, Fed Chair Jerome Powell announced a revision to the Fed’s A Simple Evaluation of Two Decades of Inflation Targeting: Lessons for the New Monetary Policy Strategy