Inflation targeting and monetary policy in practice: the experience of the Federal Reserve

Andrew Figura, David Lebow and Ekaterina Peneva

Chapter 25 in Research Handbook on Inflation, 2025, pp 533-550 from Edward Elgar Publishing

Abstract: In this chapter, we discuss the US inflation experience in the 2000s and how that experience has influenced, and perhaps been influenced by, changes in the Federal Reserve's policy framework over these years. On the whole, inflation was relatively low and stable in the 25 years before the COVID pandemic, an outcome that may reflect the credibility of monetary policy in place since the disinflation of the 1980s. While the introduction of a numerical inflation objective in 2012 added specificity, arguably it largely formalized the framework that had already been implicit. The fact that inflation generally ran below the 2 percent objective thereafter contributed importantly to the revised policy framework of 2020, which incorporated flexible average inflation targeting. The enormous shocks to both demand and supply during the pandemic generated the highest inflation in decades and threatened the stability of inflation expectations. However, monetary policy's forceful response to the surge in inflation, together with an eventual healing of the supply-side of the economy, appears to have eventually brought inflation back down. Meanwhile, the pre-COVID experience of low and stable inflation, together with the communication of policymakers’ resolve to bring down inflation, kept longer-run inflation expectations relatively stable.

Keywords: Federal Reserve; Inflation targeting; Monetary policy; COVID-19 pandemic; Flexible average inflation targeting (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035327751
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