What is the Fed doing differently on inflation now?

The Fed made a variety of changes to their monetary policy framework, but the one that has gotten the most attention has been their shift on how they approach inflation.  Instead of strictly targeting an inflation rate of 2%, they are now targeting an average inflation rate of 2% over the long term. The easiest way to think about this is that the Fed is trying to reduce the long term fluctuations in the inflation rate, where now if inflation falls below 2%, instead of targeting exactly 2% the following year, they will target something slightly higher than 2% to help make up the difference.  

In the short run, this leads to larger fluctuations, where if inflation is too low one year, then it will be higher the next, but because these short term fluctuations are designed to offset one another, the long run fluctuations in inflation will be more subdued.  The trick is that you do not want to make up the difference too quickly in order to avoid wild short term swings in inflation, which is why the Fed is adopting a "flexible form of average inflation targeting", which means they'll use their own discretion as to how to make up for the previous deviations from target, which I think makes sense.

This is in fact what the engineering department tells us we should be doing, where the debate over targeting the inflation rate versus the price level is basically a false choice.  Instead of doing inflation targeting *or* price level targeting, you should primarily be targeting the inflation rate with a little bit of effort put into trying to control the price level, which is what control theory engineers do when they use PI (proportional-integral) control, which I explain in more detail in one of my first blog posts.  The new Fed target does exactly that where it primarily targets the inflation rate but does try and correct for past deviations from target, which is essentially the same as targeting the price level just a little bit as well.  

This is does not represent a major change to the way the Fed manages monetary policy, but it is an incremental improvement and encourages the Fed to engage in more stimulative policy in the immediate aftermath of a recession, which could help speed up the recovery.  For now though, only time will tell if this change helps the economy, since it only makes a difference once inflation is about to exceed the 2% target, and we it could be some time before the economy reaches that point.