Thursday , December 14 2017
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Don’t change the forecast; change the policy

Summary:
Today the Fed abandoned its previous forecast, which called for 2% inflation in 2018. Now they forecast that inflation will run below 2% in 2018, as it has for most of the past decade. I agree that it is likely that inflation will run below 2% in 2018. Nonetheless, I believe the Fed made a mistake by forecasting sub-2% inflation in 2018. Instead, the Fed should have changed its policy, so that it could continue to forecast inflation at 2% in 2018. This is what Lars Svensson means by "targeting the forecast." The Fed is like a ship captain that intends the ship to arrive in New York, forecasts the ship will arrive in Boston, and then refuses to turn the steering wheel enough to equate the geographic

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Today the Fed abandoned its previous forecast, which called for 2% inflation in 2018. Now they forecast that inflation will run below 2% in 2018, as it has for most of the past decade.

Don't change the forecast; change the policy
I agree that it is likely that inflation will run below 2% in 2018. Nonetheless, I believe the Fed made a mistake by forecasting sub-2% inflation in 2018. Instead, the Fed should have changed its policy, so that it could continue to forecast inflation at 2% in 2018. This is what Lars Svensson means by "targeting the forecast."

The Fed is like a ship captain that intends the ship to arrive in New York, forecasts the ship will arrive in Boston, and then refuses to turn the steering wheel enough to equate the geographic goal with the geographic forecast.



Scott Sumner

Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better “induce the correct level of business investment”. In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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