The Corner

Monetary Policy

Getting to Average at the Fed

An important reason for the Fed to target inflation is to make the future path of the price level predictable. To the extent that rationale governs its thinking, it ought to try to make its errors in hitting its target cancel each other out. If its target is 2 percent annual inflation and it gets 2.5 percent inflation in one year, it should aim for 1.5 percent the next. It should, in other words, try to ensure that inflation over several years averages 2 percent.

Tim Duy says that the Fed is moving toward this kind of average inflation target. Last year I wrote that there are better and worse ways for the Fed to do that. In theory an average target makes sense; but it could easily be implemented in a way that made the business cycle more volatile.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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