The Federal Reserve's current
Fed Gov. Christopher Waller discussed the deficiencies related to the central bank's Flexible Average Inflation Targeting, or FAIT, framework
Devised in 2020 after an extensive public outreach campaign, the FAIT framework sought to better facilitate economic growth by allowing inflation to run slightly above 2% to offset periods when price growth fails to reach that target. Effectively, the goal was to have a 2% average inflation rate over time, rather than holding to a strict 2% target at any given moment.
"It was a very backward working strategy in the sense that we had a problem for 10 years in the past," Waller said, nodding to the fact that the framework was created after an extended period of below-target growth after the global financial crisis. "We thought it was going to cause problems. We designed [the framework] thinking that problem was going to continue, and then within a year, the whole thing kind of blew up."
Some economists, financial market participants and Fed watchers have blamed the FAIT framework on the Fed's decision to hold off on raising interest rates when inflation initially spiked in the wake of the COVID-19 pandemic.
Fed Chair Jerome Powell and other officials have denied this, arguing instead that the Federal Open Market Committee was merely making the judgement that the surge in price growth was the result of a temporary crisis in global supply chains that would ultimately pass — an assessment that came to be known as the "transitory" call.
Still, the Fed has committed to review its monetary policy framework every five years, meaning it is due for a revamp in 2025. Last month,
Waller did not comment on how the framework played into the Fed's thinking in 2020, but said a more forward-looking policy would benefit the institution in the long run.
"Our monetary policy strategy should be robust to whatever the economic conditions are," he said. "That may lead to very different ways of thinking about strategy going forward, as opposed to what we have in place now."
Waller's comments came during a live question and answer session. The views he expressed were his own, not a commitment to the Fed's policy approach. But as the longest tenured monetary economist on the Federal Reserve Board of Governors, his views will likely loom large in the review process.
During the event, Waller also said a simpler framework would be easier to explain to the broader public.
"You want to be kind of more clear what the strategy is. I mean, 'Flexible Average Inflation Targeting' has words in there that people are still trying to figure out," he said. "In terms of communicating our strategy, I think it might be a case where, you know, simpler is better than a more complicated strategy like we had."
