Two initiatives in central banking circles have attracted global attention as of late, one by the U.S., the other by Europe. 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.
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. 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.