The Fed's TPLT framework, Temporary Price-level Targeting - Love or hate it, you need to understand it

 

"The Federal Reserve's New Framework and Outcome-Based Forward Guidance", a speech given today (4/14/21) by Fed Vice Chairman Clarida provides a simple and clear idea of how the Fed is thinking and describing their intellectual foundations or framework for current policy. As stated by Clarida, we are beyond the period of "copacetic coincidence".

According to Clarida, who has mentioned this three times in the last few months, we have an TPLT framework, temporary price-level targeting. The markets are anchoring inflation expectations below the 2% target because of ELB, an effective lower bound, so there has to be an overshoot to break the ELB problem.  

"As I highlighted in speeches at the Brookings Institution in November and the Hoover Institution in January, I believe that a useful way to summarize the framework defined by these five features is temporary price-level targeting (TPLT, at the ELB) that reverts to flexible inflation targeting (once the conditions for liftoff have been reached)."

We have to start thinking about monetary policy using the language and guidance that has been provided by the Fed. We can disagree with the success of this policy, and we may also be willing to trade against this view, but we have to accept that this is the framework that will be driving their internal discussions. The following are the five features that represent current Fed thinking.

First, the Committee expects to delay liftoff from the ELB until PCE inflation has risen to 2 percent and other complementary conditions, consistent with achieving this goal on a sustained basis, have also been met.

Second, with inflation having run persistently below 2 percent, the Committee will aim to achieve inflation moderately above 2 percent for some time in the service of keeping longer-term inflation expectations well anchored at the 2 percent longer-run goal.

Third, the Committee expects that appropriate monetary policy will remain accommodative for some time after the conditions to commence policy normalization have been met.

Fourth, policy will aim over time to return inflation to its longer-run goal, which remains 2 percent, but not below, once the conditions to commence policy normalization have been met.

Fifth, inflation that averages 2 percent over time represents an ex ante aspiration of the FOMC but not a time inconsistent ex post commitment.