Powell Flips the Fed’s ‘Framework’

The central bank abandons its 2020 idea that inflation above its target can be useful.

WSJ editorial. Excerpts:

"The Fed at that time adopted what it called “flexible average inflation targeting.” That’s Fed-speak for saying the central bank would tolerate inflation higher than its 2% target for a time to compensate for inflation that was lower than 2% for a period."

"inflation hit 9.1% at its peak in June 2022."

"The Fed said sayonara to this on Friday, returning to plain old “flexible inflation targeting”—with the target being 2% inflation."

"failure of the Fed to acknowledge its role in igniting the pandemic-era inflation that we haven’t fully recovered from."

"One question is why the Fed has an inflation target at all. Congress has given the Fed the duty to maintain stable money, and a 2% target over time means a steady decline in the dollar’s purchasing power."

"Why not a target of zero inflation? The fear at the Fed is that this could sometimes mean the economy falls into deflation. That’s a risk, but based on the historical record it’s a relatively small one."

"The era of quantitative easing, however needed during the panic, was supposed to be temporary. Instead the Fed has maintained its $7 trillion balance sheet and pays interest on reserves to the biggest banks. The Fed would do better to return to its previously more modest place in economic policy."