Fed's Thin-Air Credit Proposal Aimed at Consistent Inflation Targets

The Federal Reserve's annual conference in Jackson Hole, Wyoming, is approaching on August 27-29, 2026. This year's theme is 'Financial Innovation: Implications for Payments Policy', but one expert suggests a more pressing topic: revising the Fed's monetary policy to achieve consistent inflation targets.

The proposal involves growing the sum of depository institution reserves and securities/loans at a constant rate. Empirical evidence shows that this growth has a high correlation with future domestic aggregate demand and inflation rates. The expert proposes setting a target rate of 5-1/2% for thin-air credit growth, which can be achieved without operating through a federal funds rate target.

The rationale behind the proposal is to prevent persistent overshoots and undershoots of the Fed's inflation target, simplifying communication challenges. The expert suggests that forward guidance could be as simple as stating the committee's intention to maintain 5-1/2% annual growth in thin-air credit at every Federal Open Market Committee meeting.