Some are still focused on the risk that Fed policy will overstimulate the economy, pushing inflation above our 2 percent target in a way that would require a sharply restraining policy response. But I would say that such fears currently are exaggerated and are a bit like the problem of generals fighting the last war. Today, looking at experiences from around the world, I think the bigger risk is that inflation in the U.S. will not get back to our symmetric 2 percent objective within an acceptable period of time.
Much of my perspective derives from how I view the symmetry of our inflation target. I would say that the FOMC has been challenged to describe what is meant by symmetry for our 2 percent inflation objective. I typically point out that a successful symmetric approach would have inflation average 2 percent over long stretches of time. In order to average 2 percent, some time will be spent above 2 percent and some time will be spent below 2 percent.
So, in the current situation, after many years of very low inflation, one has to ask, Would overshooting 2 percent be a failure or a virtue?
Current SEP forecasts from FOMC participants have inflation rising to 2 percent without overshooting our target level. I call this threading the needle to get to 2 percent. This might be consistent with a symmetric approach to inflation. But that can’t really be known with much certainty until sometime in the future when inflation is shocked above 2 percent. At that juncture, we would be able to see whether or not the FOMC responds by similarly trying to thread the needle with a shallow decline in inflation back down to 2 percent.
Given what I see today, I am skeptical that the public believes a future FOMC would act in such a manner. Indeed, when I say in speeches or panel discussions that the FOMC has a symmetric inflation target, I am often greeted with skepticism. To ensure more public confidence that the Fed’s inflation objective is indeed symmetric, we need to provide a substantial and credible example of symmetric behavior with regard to our inflation target. And we need to do it sooner rather than later.