In August 2020, the US Federal Reserve updated its long-term strategic framework, shifting from a strict 2.0% annual inflation target to Flexible Average Inflation Targeting (AIT). [1]

Under a strict inflation targeting framework, if inflation runs below the 2.0% target for several years, the central bank ignores the past miss and targets exactly 2.0% for the next year. The AIT framework introduces an explicit backward-looking cushion:

AIT Target Stance = 2.0% Benchmark Target + Compensation Factor for Past Misses

If inflation runs below the 2.0% target during an economic downturn, the AIT framework requires the Fed to keep policy rates accommodative even after the economy recovers, intentionally allowing inflation to run moderately above 2.0% for a period to bring the long-term average back to target.