Alternative Policy Rules and Post-Covid Fed Policies

Abstract The Revised Statement on Longer-Run Goals and Monetary Policy Strategy, adopted by the Federal Open Market Committee (FOMC) in August 2020, contains two major changes from the original 2012 statement. Policy decisions would attempt to mitigate shortfalls, rather than deviations, of employment from its maximum level and the FOMC would implement Flexible Average Inflation Targeting (FAIT). In August 2025, the FOMC essentially returned to the 2012 statement. We develop and analyze policy rules consistent with the original and revised statements and show how prescriptions from inertial rules are much more in accord with Fed policy than prescriptions from non-inertial rules. The differences between non-inertial and inertial rules are much larger than the differences among various non-inertial and inertial rules. The prescriptions are identical between traditional and FAIT rules. The Fed policy following the Covid-19 recession is equally well described by rules in accord with the original 2012 statement as by rules in accord with the revised 2020 statement.