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As part of the Federal Reserve’s strategy review, the introduction of a target range for inflation is being discussed. Such a range could provide flexibility in the conduct of monetary policy and it could also take into account past shortfalls in inflation. William De Vijlder from BNP Paribas dissect the FED’s strategy.

Key quotes

“In theory, the question of a target range for inflation looks simple. Rather than having a precise numerical target for inflation (2%), a range would offer some flexibility. Hence, it would calm down expectations of policy easing or tightening as soon as inflation strays from the target.”

“The Fed staff’s briefing actually discussed not one but three ranges. Given the variability of inflation, there is an uncertainty range. Within that range, no action would be warranted because of the noise in the measurement of inflation.” 

“There is also an operational range: the FOMC could, under certain circumstances, prefer to be above its longer-term target, e.g. to make up for a past period of very low inflation.” 

“Finally, there is an indifference range, whereby deviations of inflation from target would not trigger a policy response.”