Getting FAIT, Staying FIT
The History of the Fed's Consensus Statement with Jeff Lacker
I recently sat down with Jeff Lacker, former Richmond Fed president and now a Senior Affiliated Scholar at the Mercatus Center, to get his view of the Federal Reserve’s new 2025 consensus statement, released at the Jackson Hole symposium. Jeff was at the FOMC during the run-up to the original 2012 consensus statement and therefore had a front-row seat to its creation, making him the perfect person to walk us through how the framework first emerged. To fully appreciate this latest statement, Jeff first recalls the history of the consensus statement — from debates inside the FOMC during the 1990s that culminated in the 2012 version, to the more recent developments that gave us today’s framework. This journey highlights the Fed’s shifting priorities, its institutional politics, and its credibility.
The short version? The Fed has gone from flexible inflation targeting (2012), to flexible average inflation targeting (2020), and now back to a modified form of flexible inflation targeting (2025). The longer version, however, reveals how hard-fought, fragile, and politically contingent these frameworks really are.
The video above captures this rich history, along with some interesting detours into credibility, inflation target misses, and wartime financing. For readers who prefer text, I’ve included below both (1) a summary of the consensus statement’s history and (2) the full transcript of my conversation with Jeff.
A Summary of the Consensus Statement History
2012: The Breakthrough
The Fed had a “secret” 2% inflation target dating back to 1996, but Alan Greenspan insisted it remain implicit.
Ben Bernanke, a longtime advocate of inflation targeting, pushed to formalize the target when he became chair in 2006.
After years of internal debate and political resistance, the 2012 consensus statement codified the 2% target.
To get broad agreement, the statement fudged the definition of “maximum employment,” leaving it undefined.
The result was a compromise document, portrayed publicly as codifying existing practice but internally a major step forward in transparency.
2020: The FAIT Era
The Fed adopted Flexible Average Inflation Targeting (FAIT), pledging to offset past misses below 2% with overshoots above it.
The framework shifted focus to shortfalls (not deviations) from maximum employment and stressed a “broad-based and inclusive” goal.
This was a dovish tilt, signaling the Fed would allow the economy to “run hot.”
In practice, FAIT lasted barely 18 months before the inflation surge of 2021–22 forced its abandonment.
Critics (Don Kohn, the Romers, others) warned FAIT risked building in an inflationary bias and was fighting the last war (lowflation and the zero lower bound) rather than preparing for new risks.
2025: Back to FIT
The Fed’s new statement essentially says “never mind” to most of the 2020 innovations.
Key changes:
Shortfalls language dropped; the Fed again talks about “deviations” from maximum employment.
Maximum employment is defined as the highest level sustainable on a “durable” basis consistent with price stability.
The phrase “broad-based” remains, but “inclusive” was dropped.
Stronger emphasis on price stability:
The statement highlights that “price stability is essential for a sound and stable economy.”
It pledges to act forcefully to keep inflation expectations anchored at 2%.
In effect, we’ve cycled from FIT (2012) → FAIT (2020) → FIT (2025)—not identical at each stage, but clearly circling back to an older orthodoxy.
Full Transcript
Introduction & Origins
David Beckworth:
This is David Beckworth, and and I am here with my good friend Jeff Lacker, former president of the Richmond Fed, a great scholar, and now an affiliated scholar with the Mercatus Center. In fact, we've had him on the podcast, and he's done some great research with us. He's also the author of a paper that he put out a few years ago in the Cato Journal that looked at the original 2012 consensus statement.
I bring that up because we just had the new consensus statement released a few weeks ago at the Jackson Hole meetings. Chair Powell announced the new changes, it was voted by the FOMC, and we are going to talk about that. We're going to talk about the evolution of the consensus statement — from 2012, to the big changes in 2020, and then to 2025.
And I'll just throw out my punchline: we went from flexible inflation targeting, to flexible average inflation targeting, and we're back at flexible inflation targeting. So FIT to FAIT to FIT. It's a little more complicated than that, and Jeff's going to show us now because there's a lot of rich history behind the initial statement. And even the FIT we have today is not quite the same. It's close, but not quite the same as in 2012.
So, Jeff, thank you for joining us.
Jeff Lacker:
My pleasure. Great to be with you again, David.
David Beckworth:
Well, it's great to have you on. And you know, I'm excited, Jeff, that the Fed is doing these reviews every five years. Other central banks do this. I know the Bank of Canada has been doing it for a long time, so it's a good practice. So kudos to them for doing this.
So let's go back to the origin story. You were there. You were a key part of this conversation. And my understanding is if we really want to get to the origin story, we have to go way back before 2012. How far back should we go to start the story?
Jeff Lacker:
The thing to remember about the consensus statement is that the original purpose was to serve as a frame around an announcement of the Fed's numerical inflation target. It had an implicit target. In fact, I call it a secret inflation target that it adopted in 1996. And it sort of bled out in the markets. Markets figured it out just by what we did and people sort of, you know, winking and nodding and stuff. And so in the markets, they called it the Fed's implicit inflation target.
But Bernanke came into office in 2005 as chair of the Fed, having advocated an explicit inflation target in a big four-author, co-edited book from 1999. And yeah, so then the work got going, but it took until 2012 to get it over the finish line. And it's an interesting story how that happened. It was sort of tangled up, and it's always been tangled up in the dual mandate.
I mean, the inflation target — price stability, 2% — if it was just that, it would be like, boom, we're done. But the law has been on the books since 1977 that the Fed has three mandates: maximum employment, price stability, and moderate longer-term interest rates. Now, a long time ago, we threw out the moderate long-term interest rates on the argument that if inflation is low and stable, long-term interest rates will be moderate. So it's viewed as two mandates, and the employment side of the mandate has always been a problem and a difficulty. And that thread runs through the whole thing, and I think that's going to be a continuing issue going forward.
So the story starts back in 1995. There were whispers about inflation targeting before then, but in Congress, some Republicans introduced bills from time to time that would give the Fed one mandate — a single price stability mandate. And in January 1996, there was an FOMC meeting. Greenspan was scheduled to testify about his views on such a bill.
So in January 1995, he had staged a debate on price stability. The debaters were Janet Yellen, who was then the San Francisco Fed president, and Al Broaddus, who was then the Richmond Fed president. The committee was divided, with no clear view. Then in July of 1996, he went at it again. And to his surprise, Yellen and Broaddus agreed.
At that point, inflation was below 3%. They agreed that they should hold the line, not let it go above 3%, and that they'd like it to be 2%. That was a compromise on Broaddus's part — he was a strong advocate of inflation targeting, a monetarist. And it was a compromise on Janet's part — she said, yeah, we need price stability too, seems reasonable to me.
They went around the room and almost everyone agreed. So Greenspan was confronted with this consensus: we want inflation to be 2%. Well, he acknowledged the consensus, but he warned the committee: don't let this out of this room.
“You'd be really astonished at the blowback,” he said. Undoubtedly, what he had in mind was the political backlash from people who would be worried about what that meant for the employment mandate. So as I said, we sort of adopted a secret target.
The 2012 Consensus Statement
David Beckworth:
So the consensus statement finally gets over the finish line in 2012. Walk us through how that happened.
Jeff Lacker:
Right. By that point, we’d been working on it for years. After the financial crisis, Bernanke had tried a shortcut — using the Summary of Economic Projections to signal a de facto inflation target. But there wasn’t convergence, and politically it was dicey. Obama was okay with it, but Barney Frank opposed it. Some governors were skeptical too.
By 2010–2011, with QE2 coming, Bernanke wanted to signal a regime change — like Roosevelt in 1934 or Volcker in 1979. But the committee was divided. In October 2010, the idea died after a tumultuous meeting.
Then Charlie Plosser stepped in. He approached Bernanke and offered to work with other Fed presidents to draft something. He pulled together Bullard, Evans, Kocherlakota, and Rosengren. They were a balanced group — some hawks, some doves, but all modern macroeconomists. They drafted a statement in 2011. The presidents circulated it, and it got wide support.
Meanwhile, there was a push for forward guidance. Charlie Evans proposed tying guidance to an unemployment threshold. But people balked: how can we put out a number for unemployment if we haven’t even said what our inflation target is? That added impetus to get the consensus statement done.
By late 2011, Bernanke asked the communications subcommittee — chaired by Janet Yellen — to refine the draft so governors would support it. After revisions, it was adopted in January 2012.
David Beckworth:
And the compromises were important.
Jeff Lacker:
Yes. The statement committed the Fed to a 2% inflation goal, but the language on employment was deliberately fuzzy. It said maximum employment was determined by non-monetary factors and couldn’t be specified as a fixed number. But then it pointed to the SEPs, without actually saying the SEP long-run unemployment projections were maximum employment. That ambiguity was crucial. If they had said it outright, several of us would have voted no.
So that was the “fudge.” It allowed everyone to sign on. The final vote was nearly unanimous, with only one abstention. The financial press didn’t really pick up on the nuance — they assumed the SEP numbers were the Fed’s employment target. But in reality, the FOMC never made that commitment.
David Beckworth:
So the 2012 statement was both a breakthrough and a compromise.
Jeff Lacker:
Exactly. It was portrayed as codifying existing practice, but Bernanke saw it as a regime change to better anchor expectations. To minimize political blowback, though, they downplayed that. Barney Frank gave reluctant acquiescence. The result was a statement that looked modest but was actually a big institutional step forward.
The 2020 Framework (FAIT)
David Beckworth:
So, Jeff, let’s turn to 2020. That framework was fascinating, at least to me. Depending on who you ask, maybe not so fascinating. But it incorporated makeup policy — which I was excited about — and also some asymmetries, which I was less excited about. How did we end up with the 2020 framework?
Jeff Lacker:
The main motivation, as stated in the 2020 document, was the decline in the neutral real interest rate. Because real interest rates had fallen, the committee expected to hit the zero lower bound more often. That created a concern that policy would be constrained more frequently in the future.
So they came up with makeup policy. The idea was that when inflation ran below 2%, the Fed would commit to making it up by letting inflation run above 2%. The goal was to raise inflation expectations when inflation was below target.
But here’s the key: they never adopted the symmetric version of that policy. They didn’t say anything about bringing inflation down if it rose above 2%. So it was an explicitly asymmetric framework, tilted toward more stimulus.
David Beckworth:
And they signaled that in the language, right?
Jeff Lacker:
Exactly. In the 2012 statement, they listed the three parts of the mandate in neutral order. In 2020, they switched it — employment came before inflation. That may seem trivial, but it was a signal.
Then they added that maximum employment was a “broad-based and inclusive goal.” That language struck me as gratuitous. The Fed can’t really affect how inclusive employment is, beyond stabilizing the overall macroeconomy. But adding that phrase signaled a tilt toward elevating the employment mandate.
They also changed “deviations” from maximum employment to “shortfalls.” That meant they were only concerned when employment was below maximum, not when it was above. The implication was: overshooting was fine. Run the economy hot and see how far it could go.
David Beckworth:
And they were basically saying, “We’re going to probe for maximum employment.”
Jeff Lacker:
Yes. Someone described it as painting a picture of the committee probing for maximum employment. The idea was: the Phillips curve is flat, so let’s keep pushing. Don’t worry about overheating or inflation. Just run the economy hot until we see where the limits are.
David Beckworth:
But it didn’t last long.
Jeff Lacker:
No. FAIT officially lasted until 2025, but in practice it was dead by March 2022. As soon as inflation spiked — the highest in forty years — the Fed abandoned it. Richard Clarida put it bluntly: the Fed was back to having a single mandate, price stability.
David Beckworth:
And what’s striking is how quickly criticism of FAIT emerged.
Jeff Lacker:
Yes. Brookings panels, the Romers, Don Kohn, Gauti Eggertsson — they all criticized the framework. The Romers, for example, wanted to remove the “broad and inclusive” language about employment. Kohn said the framework baked in an inflationary bias. Eggertsson argued it was fighting the last war.
The main takeaway from those critiques was that FAIT tilted policy in a dovish direction and created inflationary bias. That might be okay if you’re truly stuck at the zero lower bound. But you don’t want a framework that only works for one scenario. You need something robust to multiple environments.
David Beckworth:
So the criticism was that FAIT was too context-specific, right?
Jeff Lacker:
Exactly. It was designed for a world of secular stagnation and chronically low inflation. But when circumstances changed — when inflation surged — the framework was inappropriate. And that’s why it collapsed so quickly in practice.
The 2025 Framework
David Beckworth:
So, Jeff, let’s turn to 2025. What do you make of the new consensus statement?
Jeff Lacker:
Well, the short version is: “never mind about 2020.” They basically rolled back most of FAIT.
They deleted the “shortfalls” language and went back to “deviations” from maximum employment. They added new wording about maximum employment being the highest level that can be achieved on a “durable, sustained basis” consistent with price stability. That’s new. It’s a way of saying, look, you can run the economy hot in the short run, but that’s not really maximum employment unless it’s sustainable.
They also dropped the word “inclusive.” “Broad-based” stayed, but “inclusive” was taken out. That’s telling.
David Beckworth:
And they emphasized price stability much more strongly.
Jeff Lacker:
Yes. They opened the inflation paragraph with: “Price stability is essential for a sound and stable economy and supports the well-being of all Americans.” That’s powerful. They also added: “The committee is prepared to act forcefully to ensure that long-term inflation expectations remain anchored at 2%.”
That’s the best part of this new framework, in my view. It’s a direct acknowledgment that credibility matters, and that the Fed will stomp on the brakes if necessary.
David Beckworth:
But they didn’t go all the way back, right?
Jeff Lacker:
Correct. They left themselves some wiggle room. For example, they included a line saying the economy could run above maximum employment in real time without necessarily creating price stability problems. That’s not full “shortfalls” language, but it’s not pure “deviations” either. It’s somewhere in between.
David Beckworth:
So you’d call this FIT, but not exactly the 2012 FIT.
Jeff Lacker:
Right. It’s FIT 2.0, if you will. Back to flexible inflation targeting, but not identical to the original.
David Beckworth:
What about the ordering of priorities?
Jeff Lacker:
That’s one disappointment. They still kept the employment paragraph before the inflation one. Carl Walsh pointed this out at the framework review conference earlier this year. His point was: if the Fed believes inflation is what it can truly control in the long run, that should come first. Putting employment first fuzzes the relationship and creates confusion about what the Fed can actually deliver.
David Beckworth:
So in a way, the Fed missed an opportunity?
Jeff Lacker:
Yes. They rolled back FAIT, but they didn’t take the chance to clarify the asymmetry. The Fed can reliably deliver low and stable inflation in the medium to long run. Its influence on employment is indirect and depends on structural factors. The statement still obscures that.
David Beckworth:
It’s interesting that this whole process now feels less like a “constitutional” document and more like a corporate strategy plan that gets revised every five years.
Jeff Lacker:
Exactly. When we first drafted the 2012 statement, we thought of it as a constitutional document — something foundational that would command near-unanimous support and stand the test of time. But now, with the five-year reviews and the big swings between 2020 and 2025, it feels more transitory. More like a corporate plan or even a Communist Party five-year plan.
That weakens a different dimension of credibility. Not just whether they’ll hit 2% inflation, but whether the framework itself is durable.
Reflections & Wrap-Up
David Beckworth:
Jeff, let’s step back and reflect. The 2025 framework makes a big statement about credibility. How do you think the Fed’s credibility has been affected by the events of the past few years?
Jeff Lacker:
I think it’s been weakened. Inflation surged, and that shook public confidence. Surveys of inflation expectations show it — both in the means and medians, but also in the dispersion. Expectations are more spread out now. That suggests people aren’t as confident that the Fed will deliver 2%.
And beyond surveys, look at behavior. People are more inflation-sensitive now. During the 25 years from 1995 to 2020, people didn’t really pay much attention to inflation. They assumed it would hover around 2%. Then suddenly, in 2021–22, inflation surged, and now households are on alert.
David Beckworth:
That’s consistent with what I’ve seen too. Gallup and other polls show inflation ranking as a top public concern — well above unemployment. And even in Google search data, people are looking for inflation much more than they did before.
Jeff Lacker:
Exactly. If you plot Google Trends data on the word “inflation,” it’s flat from 2004 to 2020. Then it explodes. It’s come down from the peak, but it’s still at a permanently higher level. And if you compare those search spikes to actual inflation, there’s a clear threshold: below 3.5 or 4%, nobody pays attention. Once inflation goes above that, interest skyrockets.
So households are now primed. Any whiff of inflation above 3.5 or 4% could trigger big reactions in expectations and behavior. That’s a legacy the Fed will have to deal with for a long time.
David Beckworth:
And there’s the fiscal angle too. Some have argued that inflation ended up doing part of the work of financing the pandemic-era spending surge.
Jeff Lacker:
That’s right. George Hall and Tom Sargent’s work is clear: governments have choices in how they finance wartime-like expenditures. They can issue debt, raise taxes, or allow inflation to erode liabilities. In the pandemic, the U.S. leaned more heavily on inflation than in past episodes.
That choice had distributional consequences. Inflation affects households differently than debt-financed spending would. And those consequences have political fallout. I think the Fed played a role in enabling that choice, by not raising rates as quickly as it might have in 2021.
David Beckworth:
So the Fed’s credibility has taken hits on two fronts: inflation expectations are shakier, and the framework itself feels less durable.
Jeff Lacker:
Yes. When we crafted the 2012 statement, we viewed it as a constitutional document — foundational, near-unanimous, and long-lasting. But now, with revisions every five years and with the huge swing from FAIT to FIT in just one cycle, it feels like a short-term strategy plan. That makes it harder to build up the sense of permanence and institutional credibility that a central bank needs.
David Beckworth:
Well, Jeff, this has been a rich conversation. Thanks for walking us through the history and reflecting on what it means.
Jeff Lacker:
My pleasure, David. Always great talking with you.
David Beckworth:
Thanks for joining me. And thanks to our listeners for following. I’ll be putting this transcript and video up on my Substack.