December 2020 issue contents
What Rule for the Federal Reserve? Forecast Targeting

Lars E.O. Svensson
Stockholm School of Economics, CEPR, and NBER


Forecast targeting means selecting a policy rate and policy rate path so that the forecasts of inflation and employment "look good," that is, best fulfill the Federal Reserve's dual mandate. It means publishing, explaining, and justifying the path and forecasts. This contributes to their credibility and to effective policy implementation. External observers can review policy and hold the Federal Reserve accountable, both in real time and after the fact. Forecast targeting uses all relevant information and allows adaption to new circumstances and therefore performs better than a Taylor-type rule. The Federal Reserve is arguably to a considerable extent already practicing forecast targeting. Forecast targeting can be used with the new monetary policy strategy of flexible average inflation targeting announced in August 2020.

JEL Codes: E52, E58

Full article (PDF, 57 pages, 1,220 kb)