Federal Reserve Formally Ends Average Inflation Targeting, Reaffirming Steadfast 2% Goal

The Federal Reserve has officially moved away from its Average Inflation Targeting (AIT) framework, a shift that economist Alex Krüger describes as a "cosmetic change" given the central bank's continued commitment to a 2% inflation target. In a recent social media post, Krüger asserted, "The Fed removed average inflation targeting (AIT), not inflation targeting. The target remains 2%." He further noted that AIT "has not been a binding constraint for years, and won't be binding for another two years, so its removal represents a cosmetic change.

The Federal Reserve adopted Average Inflation Targeting in August 2020, a strategy designed to allow inflation to moderately exceed 2% for a period following times of below-target inflation. This "makeup strategy" aimed to ensure that inflation averaged 2% over the longer run, providing the central bank with greater flexibility to support maximum employment, particularly when interest rates were near their effective lower bound. It marked a significant evolution in the Fed's monetary policy framework.

However, Federal Reserve Chair Jerome Powell confirmed on August 22, 2025, that the central bank has returned to a more traditional flexible inflation targeting approach. Speaking at the annual Jackson Hole conference, Powell explicitly stated, "we returned to a framework of flexible inflation targeting and eliminated the 'makeup' strategy" that was part of the 2020 framework. This formal announcement clarifies the Fed's operational stance amidst evolving economic conditions.

Despite the formal elimination of AIT, the Federal Reserve's long-standing 2% inflation objective remains unchanged and central to its dual mandate of maximum employment and price stability. The recent policy adjustment underscores the Fed's commitment to anchoring longer-term inflation expectations at this level. This continuity in the ultimate target supports Krüger's view that the recent change primarily formalizes a practical shift that had already occurred.

Analysts suggest that the Fed's practical approach to combating high inflation in recent years had already de-emphasized the "average" aspect of AIT, making its formal removal a logical step. The focus has consistently been on bringing current inflation rates back down to the 2% target. This clarification in the Fed's framework aims to enhance transparency and ensure clear communication regarding its primary objective of price stability.