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

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Abstract

In August 2020, the Federal Reserve replaced Flexible Inflation Targeting (FIT) with Flexible Average Inflation Targeting (FAIT), introducing make-up strategies that allow inflation to temporarily exceed the 2% target. Using a synthetic control approach, we estimate that FAIT raised CPI inflation by about 1 percentage point and core CPI inflation by 0.5 percentage points, suggesting a moderate impact net of food and energy and a largely temporary effect. Short- to medium-term inflation expectations increased by approximately 0.8 percentage points, while long-term expectations remained anchored. The effects of FAIT on economic activity were, if anything, minimal. Our results are robust across multiple specifications, including alternative price indices, synthetic control estimators, control groups and adjustments for global supply chain pressures, economic activity, fiscal policy, commodity prices, interest rates and monetary aggregates. The differing macroeconomic outcomes under FAIT versus a counterfactual FIT characterized by moderate inflationary effects, negligible real effects and anchored long-term expectations, are consistent with the hypothesis of a steeper-than-expected post-pandemic Phillips curve in the New Keynesian model.

Suggested Citation

  • Roberto Duncan & Enrique Martínez García & Luke Miller, 2025. "Tempting FAIT: Flexible Average Inflation Targeting and the Post-COVID U.S. Inflation Surge," Working Papers 2511, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:99826
    DOI: 10.24149/wp2511
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    Keywords

    flexible average inflation targeting; flexible inflation targeting; monetary policy counterfactuals; Phillips curve slope; inflation expectations anchoring; synthetic control method;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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