The Lower and Upper Bounds of the Federal Open Market Committee’s Long-Run Inflation Objective
It is widely acknowledged that the Fed can control the average inflation rate over a period of time reasonably well. Because of this and the Federal Open Market Committee’s (FOMC’s) long-standing commitment to price stability, the author argues that the FOMC has an implicit long-run inflation objective (LIO)—lower and upper bounds to the long-run inflation rate. He shows that the statements made by the FOMC in 2003 clarified the lower bound of its LIO and that the average of long-run inflation expectations responded by rising about 80 basis points. Moreover, consistent with reducing the market’s uncertainty about the FOMC’s LIO, long-run inflation expectations became more stable. The FOMC has recently been more specific about the upper bound of its LIO as well. The FOMC could eliminate the remaining uncertainty by establishing an explicit, numerical inflation objective.