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

Roberto Duncan, Enrique Martínez García () and Luke Miller ()
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Luke Miller: https://gufaculty360.georgetown.edu/s/contact/0031Q00002DdRFfQAN/luke-miller

No 2511, Working Papers from Federal Reserve Bank of Dallas

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.

Keywords: flexible average inflation targeting; flexible inflation targeting; monetary policy counterfactuals; Phillips Curve slope; inflation expectations anchoring; synthetic control methods (search for similar items in EconPapers)
JEL-codes: C32 C54 E52 E58 E61 E65 (search for similar items in EconPapers)
Date: 2025-04-09, Revised 2026-06
New Economics Papers: this item is included in nep-cba and nep-mon
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DOI: 10.24149/wp2511r1

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