Inflation Target: Inflation Expectations

inflation target: The first is the Average Inflation Targeting AIT which the U.S. Federal Reserve initiated in August 2020 a departure from the conventional framework of inflation-targeting, according to The Japan Times. The Fed set a 2% long-term inflation target in 2012, but actual inflation has remained disappointingly below the target and long-term inflation expectations have been sluggish over the past two years. ; Theoretically, the new framework should be more powerful in terms of raising inflation, since the duration of the current monetary easing measures of a virtually zero-interest rate policy will surely be extended, given that the underperforming period of the previous policy will be added to the future period of maintaining the low interest rate course. The two new policies are different in nature, but both are a departure from past practices something that may eventually put the two central banks' credibility at stake. Under the new framework, the Fed intends to offset periods that undershot the 2% target with periods that overshot the target rate. As individuals, companies and markets fully understand this and begin to expect future inflation to be higher and stabilize at around 2%, these changes will immediately lead to a higher actual inflation rate and long-term inflation expectation. For example, if an inflation rate of 1.5% continued for the past three years, the current low interest rate policy will be maintained until an inflation rate of around 2.5% is achieved from now on for the next three years or longer, which would average out to the 2% target. (news.financializer.com). As reported in the news.