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The 2% Target
When the late Federal Reserve Chair Paul Volcker started battling inflation in 1979, he wasn’t aiming for a specific target. “[I]n the summer of 1982, the inflation rate was clearly falling well down into the single digits,” recalled Volcker in “Keeping At It: The Quest for Sound Money and Good Government,” his 2018 memoir. That rate hit 4% by year end.
The idea of a quantitative inflation target was anathema to Volcker, who believed in a principles-based approach to inflation fighting. “No price index can capture, down to a tenth or a quarter of a percent, the real change in consumer prices,” he wrote.
An explicit, 2% inflation target has only been publicly communicated by the Fed since 2012. The policy was a post-crisis parting gift from Chair Ben Bernanke, who stepped down in 2014 and had long advocated for inflation targeting.
“... Announcing an inflation target instills discipline and accountability, because it forces policymakers either to hit their target or to offer a credible explanation for why they missed,” Bernanke wrote in his memoir, “The Courage to Act: A Memoir of a Crisis and Its Aftermath,” in 2015. Yet, inflation targeting was controversial, he explained, as “the Federal Reserve had long valued its discretion to respond flexibly to economic developments without the constraint of an announced target.” Some members of the Federal Open Market Committee under Bernanke opposed setting targets; others favored a target range hovering around 1%. A 2% target won out.
We’re seeing these decisions play out today in the first inflationary test of this target. In a speech last month in Jackson Hole, Wyoming, Chair Jerome Powell seemed to credit a transparent inflation target with helping to put the U.S. economy back on the right track, with prices rising 2.5% over the past year — just above the 2% target. “Disinflation while preserving labor market strength is only possible with anchored inflation expectations,” he said, “which reflect the public's confidence that the central bank will bring about 2 percent inflation over time.”
A soft landing — curbing inflation while avoiding a recession, in other words — looks achievable, he indicated.
Volcker’s inflation fight was prolonged and damaging, with the U.S. experiencing a brief economic downturn in 1980 and a recession in 1981-82. Here’s hoping Powell’s Fed can deliver on its target.
• Emily McCormick, vice president of editorial & research for Bank Director
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