Asymmetric Credibility at the Fed and Price-Level Targeting: While we in the US don’t have the disinflation (positive but declining rates of inflation) problem facing the Eurozone, our benchmark inflation rate has consistently undershot its mark. The Federal Reserve target for the core PCE deflator is 2%, year-over-year, and yet it hasn’t hit that growth rate even once since April of 2012. Since then, the average rate of PCE core inflation is 1.5% (Euro area core inflation was last seen growing at 0.6%).
Note also that the 2% is a target, not a ceiling (though there’s often ambiguity around this), meaning if you’ve been below for a while, it’s consistent with hitting your target rate on average to be above it for a while as well.
And yet, the question of whether the Fed is adequately meeting the “stable prices” part of its dual mandate (the other part is, of course, full employment) seems almost uniformly to be whether it’s keeping inflation from going above 2%. In other words, the Fed’s inflation credibility is asymmetric: they only lose credibility points for going above 2%.
As a policy matter for a healthy economy, this is wrong...