Tuesday, January 26, 2016

The Latest Central Bank Fad: Asymmetric Inflation Targeting

I have noted many times here how the Fed's treats its 2% inflation target as more of a ceiling than a symmetric target. Apparently, the ECB is even more brazen in its asymmetric interpretation of its inflation target (my bold):
The ECB has got itself into an extraordinarily difficult position. It has missed its policy target — a headline rate of inflation at “close to but below” two per cent — for four years. The target has lost credibility. Once people have lost confidence in an inflation target, it becomes very hard for the central bank to persuade them to trust the target again. 
It was touching to hear Mr Draghi last Thursday talk about failing to reach a goal, then to try again and to fail again. I do not doubt his determination but the minutes of the December 3 meeting of the governing council tell us that not everybody supports the target in the same way... One [governor] said that he would not accept a further increase in QE unless the eurozone was once again in deflation. The implicit message of that statement is that this particular governor’s policy target must be zero per cent, not two per cent. He will only act once prices actually fall. 
[A former governing council member] confirms something I had suspected for a long while but was never able to confirm: he cares if inflation is above the target but less so when it is low. The target becomes asymmetric... Germany’s economic establishment has its unofficial inflation target, which I would put at a range of 0-2 per cent. If that were the target, no policy action would be needed now. 
To me this all shows that, as an institution, the ECB is only partially committed to its stated goal. This is one of the reasons why it keeps missing its policy target.
This can mean only one thing: it is time to update my inflation targeting chart from this earlier post. Asymmetric inflation targeting seems to be the new fad at central banks, at least the big ones. 


  1. Great pic, David:

  2. The problem with central banks, especially the Fed, is NOT that they treat their inflation target as asymmetric. But it is that they treat their overall mandate as asymmetric. Cut rates a lot and fast, keep it lower for longer in response to every dip down in the stock market, every dip down in every asset market and raise very very slowly if at all. They have perpetuated bubbles and you are accusing them of the opposite.

  3. I admire your optimism about the Fed.

    1. Hey Ken, how are you? I guess someone has to be the eternal optimist.

    2. I am happy for optimists; they make the rest of us look good--generally, when we wish we had been wrong.

      Looking at Trimmed Mean PCE, I'm having trouble seeing Fed willingness to tolerate 1.60-1.75%, let alone 2.00%. The only time we touched anything above 2$ was coming straight out of the bottom, with those "shards of glass"--er, "green shoots."

  4. Great post--- remember, there are FOMC members who have declared they would prefer deflation. There are others who said they preferred 0% inflation, however measured.

    In memory, I cannot remember an FOMC member saying that 3% inflation would not be too bad for a few years. And I cannot recall an FOMC member saying that his ceiling is 4% unemployment.

    Is an independent Fed really a good institutional arrangement?

  5. Oh, Level targeting, level targeting. My kingdom for a level target!