Why did the Fed shift to flexible average inflation targeting?

The short answer

The Fed adopted FAIT in August 2020 because it concluded that the existing inflation framework had failed to keep inflation at its 2% target during the post-2008 recovery. From 2012 to 2020, inflation had averaged below 2%, and the recurring problem of hitting the zero lower bound limited the Fed’s ability to fight future recessions.

The new framework promised that after periods of inflation running below 2%, the Fed would aim for moderately above-2% inflation for some time, so that 2% would be achieved on average. The intuition was that committing to make-up policy would anchor expectations more firmly at target, making the target easier to hit going forward.

FAIT was abandoned in August 2025 because the post-pandemic inflation surge — peaking at 9.1% CPI in June 2022 — revealed two flaws: the framework was asymmetric (the Fed only committed to make up undershoots, not overshoots), and it was poorly suited to a high-inflation regime where the binding concern was inflation expectations rising rather than falling.

→ New to monetary policy? Why does the Fed have a 2% inflation target?

What the data shows

FAIT operated for almost exactly five years, providing a clean empirical record of its performance.

The empirical record (Federal Reserve, FRED, Brookings, AIER, 2020-2025):

• FAIT was adopted at Jackson Hole on August 27, 2020, replacing the flexible inflation targeting framework that had been in place since 2012
• US headline CPI peaked at 9.1% YoY in June 2022 and core CPI peaked at 6.6% in September 2022 — far above the 2% target
• The Fed’s first rate hike under FAIT did not come until March 2022, despite inflation having been above 2% since April 2021 and rising rapidly
• FAIT was officially abandoned at Jackson Hole on August 22, 2025, with the framework returning to flexible inflation targeting

The exception that nuances the framing: defenders of FAIT (including Powell himself) have argued that the framework did not delay tightening — that the Fed was tracking the data and would have responded similarly under any framework. Critics (Beckworth, Plosser, AIER) counter that the “shortfalls” language and the make-up commitment created institutional inertia that delayed action.

→ Dataset: US core CPI inflation dataset

Why it happens — the macro mechanism

FAIT was designed to operate through three channels, each of which encountered difficulties in execution.

Expectations anchoring channel. The theoretical rationale for FAIT was that committing to make-up periods of inflation overshoot would prevent inflation expectations from drifting downward when the policy rate hit the zero bound. By promising “we will let inflation run hot if we have run cold,” the Fed hoped to keep medium-term expectations anchored at exactly 2%, not below.

Asymmetric design channel — the hidden flaw. Contrary to the symmetric framing of “average inflation targeting,” FAIT was asymmetric by construction. The Fed only committed to make up undershoots (allowing above-2% inflation after below-2%); it never committed to make up overshoots (engineering below-2% inflation after above-2%). This asymmetry was justified at the time by the persistent post-2008 undershoot, but it meant that markets had no reason to expect inflation to actually average 2% — they could rationally expect it to average above 2%.

This is exactly what happened: long-term inflation expectations rose during 2021-2023 as markets understood the asymmetry.

Shortfalls language channel. Alongside FAIT, the 2020 framework introduced the concept of addressing employment “shortfalls” rather than “deviations” from maximum employment. This signaled that the Fed would not preemptively raise rates to cool a hot labor market — a deliberate departure from previous practice. Combined with FAIT, this created institutional language that delayed the start of the 2022 hiking cycle.

Synthesis by regime: under the pre-2020 FIT framework, the Fed treated 2% as a symmetric target and would respond preemptively to either over- or undershoots; under FAIT (2020-2025), the Fed signaled tolerance for above-target inflation following undershoots, but the post-2021 inflation surprise exceeded any reasonable interpretation of “moderate overshoot”; under the post-2025 FIT 2.0 framework, the Fed has returned to symmetric inflation targeting with explicit removal of both the average-inflation language and the shortfalls language.

FAIT was a one-sided promise dressed as a symmetric rule: the Fed bought asymmetric flexibility but lost the credibility that made the rule effective.

→ Framework: Central banks, monetary policy and market transmission

What it means for different economic actors

Savers. FAIT implicitly promised lower real returns on cash and short-duration bonds during periods of below-target inflation, since policy rates would be kept lower for longer. The post-2025 return to symmetric FIT has historically supported higher real returns by signaling that the Fed will respond more aggressively to inflation surprises.

Investors. Long-duration assets benefited from FAIT’s tolerance of inflation overshoots, since lower expected real rates supported higher equity multiples and longer bond duration. The 2025 framework reversal has implications for the discount rate environment: a more hawkish framework tends to raise the equilibrium term premium.

Pension funds and insurers. Long-dated liabilities are particularly sensitive to whether the inflation regime is symmetric or asymmetric. The asymmetric FAIT framework created additional uncertainty about the discount rate path; the 2025 FIT reversion provides cleaner long-term planning conditions for institutions matching long liabilities.

A common error is to read the FAIT-to-FIT transition as a hawkish shift. In substance, it is a symmetry restoration: the Fed has not raised its target nor signaled tolerance for below-2% inflation — it has merely committed to respond to deviations from 2% in either direction.

Practical observation

Go deeper

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Frequently asked questions

Did FAIT cause the post-pandemic inflation surge?

The honest answer is no, but it may have delayed the response. The 2021-2022 inflation surge had multiple drivers: pandemic supply shocks, fiscal stimulus of unprecedented size, energy price increases following Russia’s invasion of Ukraine, and pent-up demand. FAIT did not cause these forces. However, the framework’s “shortfalls” language and asymmetric make-up commitment likely contributed to the Fed waiting until March 2022 to start hiking, even though core CPI had been above 5% since June 2021. The cost of FAIT was probably in the timing of the response, not the level of inflation reached.

Why was FAIT considered asymmetric?

FAIT explicitly committed the Fed to allow above-2% inflation following periods of below-2% inflation. It did not commit the Fed to engineer below-2% inflation following periods of above-2% inflation. This made the framework asymmetric by design: the make-up policy applied in only one direction. As long as the binding concern was post-2008 undershoot, the asymmetry seemed harmless or even beneficial. Once inflation surged above target in 2021-2022, the asymmetry became a credibility problem — markets had no reason to expect inflation to actually average 2% over time.

What replaces FAIT in the 2025 framework?

The 2025 framework returns to flexible inflation targeting (FIT) — the same approach the Fed used from 2012 to 2020. Under FIT, the Fed treats 2% as a symmetric target and responds to deviations from it in either direction. The framework is “flexible” in that it allows for transitory deviations (for example, due to one-off supply shocks) without immediate policy response, but it does not commit to make-up policy in either direction. The 2025 statement also removed the “shortfalls” language for employment, signaling that the Fed retains the option to preemptively respond to a hot labor market.

Last updated — 19 May 2026