Evolution of Fed’s inflation target from 1.5% to 2%..

Adam Shapiro and Daniel J. Wilson of San Francisco Fed in this research trace the numerical value of Fed’s inflation target:

A narrative analysis of the historical FOMC meeting transcripts indicates that FOMC participants generally expressed a preference for an inflation target around 1½% from 2000 to around 2007. By the end of the Great Recession in 2009, however, the consensus had clearly shifted to 2%. This became the official target announced to the public in 2012. One plausible explanation for this shift is that hitting the zero lower bound in a low inflation environment brought the potential benefits of a higher inflation target to the forefront. As many academic studies and even FOMC participants have discussed, a higher inflation target could potentially lower the risk of hitting the zero lower bound in future recessions.

We also found that actual inflation from 2000 to 2007 was considerably above the 1½% consensus preferred target. Does this imply the FOMC failed in meeting its objectives during this period? Not necessarily. First, while FOMC participants may explicitly state in private their preferred rate of inflation, the committee’s monetary policy actions may be consistent with a different target. Second, the FOMC’s objectives may have included higher economic growth in addition to having inflation near its target, as found in Shapiro and Wilson (2019). With such multiple objectives, achieving higher growth over a given period could involve some trade-off with inflation being above target.

When and who mentioned inflation target first?

Discussions of explicit inflation targeting did not begin to appear in the FOMC meetings until around 1994. Before then, FOMC participants occasionally mentioned an objective of “price stability” without relating that to an explicit inflation target. One illuminating exception was a statement by Federal Reserve Board Governor David Mullins in the November 1993 meeting that suggested an implicit target moving below 3% by that time: “I think there’s a real payoff not just from stabilizing inflation in the 3–4% range but in moving lower.”

The first serious consideration of an explicit inflation target we could find comes from St. Louis Fed President Thomas Meltzer in 1994. At the July meeting that year, he said, “If we don’t make an explicit statement in this FOMC testimony with respect to our long-run expectations on inflation that goes beyond ‘we think price stability is good,’ and get more specific in terms of a target range, then at the very least I think we have to make it clear that we consider 3% inflation to be unacceptable.” A few meetings later, in November 1994, he stated: “I feel that it may be time for us to consider setting a specific inflation target that looks out into the future. I think, and this point was made as well, that it could make our job considerably easier in circumstances like the present—with upward cyclical inflationary pressures—if people were willing to look out to a longer-range target and that added to credibility.”



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: