The Federal Reserve's framework, adopted in August 2020, that allows inflation to overshoot 2% to make up for prior undershoots — a symmetric average over time rather than a strict point target.
How it works
Under FAIT, the Federal Open Market Committee no longer aims for 2% inflation every period. Instead, it targets an average inflation rate of 2% over an unspecified horizon — so if inflation runs below 2% for an extended stretch, the Committee will tolerate (and even seek) inflation moderately above 2% afterward to balance the average. The "flexible" prefix signals that the averaging window, the magnitude of the make-up overshoot, and the speed of return are all left to Committee discretion rather than codified in a rule.
The framework is asymmetric in one practical respect: the Statement on Longer-Run Goals committed the FOMC to addressing "shortfalls" from maximum employment, not deviations in both directions. This phrasing was meant to allow the labour market to run hot without an automatic preemptive tightening — a reaction to the pre-2020 critique that the Fed had hiked too early in 2015–18.
Why it matters now
FAIT defined the Fed's 2020–2022 reaction function and is widely blamed — including by some former Fed officials — for the inflation overshoot that followed. The 2025 framework review unwound much of it: the FOMC reverted the employment language to a symmetric "deviations" formulation and explicitly noted that the make-up strategy was designed for a low-inflation, zero-lower-bound regime that no longer applies. Whether the next framework keeps any averaging element, or returns to a clean point target, is one of the open monetary policy questions for 2026.
Example
In September 2020, with core PCE inflation at 1.4% and the policy rate at the effective lower bound, FAIT implied that the FOMC would keep rates near zero even if inflation exceeded 2% in the recovery — a commitment that materially compressed real rates in 2021. By mid-2022, with core PCE at 5.0%, the same framework was being criticised for delaying the hiking cycle by an estimated two to three quarters relative to a strict 2% target rule.
Frequently asked
- What is FAIT?
- FAIT (Flexible Average Inflation Targeting) is the Federal Reserve's monetary policy framework, adopted in August 2020, that targets 2% inflation on average over time rather than every period. After stretches of below-target inflation, the FOMC tolerates moderate overshoots to balance the average. The 'flexible' prefix leaves the averaging window, overshoot size, and return speed to Committee discretion rather than a fixed rule.
- Why did the Fed adopt FAIT in 2020?
- The Fed adopted FAIT to address chronic below-target inflation and a binding effective lower bound on rates. Powell announced it at Jackson Hole in August 2020 after a multi-year framework review. The logic: with rates stuck near zero, persistent undershoots risked unanchoring inflation expectations downward, so committing to make-up overshoots would lift expectations and ease real-rate constraints during downturns.
- Did FAIT cause the 2022 inflation overshoot?
- FAIT is widely blamed for delaying the 2022 hiking cycle, though it was not the sole cause. By committing to tolerate above-2% inflation as make-up, the framework discouraged preemptive tightening even as core PCE climbed toward 5.0% by mid-2022. Critics, including former Fed officials, estimate it pushed the first hike two to three quarters later than a strict 2% target rule would have.
- How does FAIT differ from a standard inflation target?
- A standard inflation target aims for 2% every period and treats past misses as bygones, while FAIT averages inflation over time and deliberately compensates for prior undershoots with future overshoots. FAIT also paired this with an asymmetric employment mandate addressing 'shortfalls' rather than two-sided deviations, allowing the labour market to run hot without automatic preemptive tightening.
- Is FAIT still the Fed's framework in 2026?
- No — the Fed's 2025 framework review unwound most of FAIT. The FOMC reverted the employment language to a symmetric 'deviations' formulation and noted the make-up strategy was designed for a low-inflation, zero-lower-bound regime that no longer applies. Whether any averaging element survives, or the Fed returns to a clean point target, remains an open question for 2026.