Questioning the Federal Reserve’s 2% Inflation Target
By The 2% inflation target is one of the most important economic goals for the Federal Reserve and many other central banks around the world. This relatively arbitrary target, however, is being questioned by some economists.[0] Josh Bivens, director of research at the Economic Policy Institute, told CNBC that “the 2% inflation target, it’s relatively arbitrary.”[1]
The Federal Reserve Bank of St. Louis explains that the 2% inflation target is key to the Federal Reserve’s vision for stable prices in the U.S. economy. Canada, Australia, Japan and Israel are among the many economies that also have 2% inflation rate targets, according to the International Monetary Fund.[1]
In 2007, some economists wrote a letter to the Fed arguing for a higher ceiling, with Laurence Ball, professor of economics at Johns Hopkins University, among those who signed it.[0] Ball stated that “there’s no evidence that 3% or 4% inflation does substantial damage relative to 2% inflation.”[0]
The Fed is unlikely to change its target amid the current hiking cycle.[0] This means that the questions of what is the appropriate rate of inflation, and why the Federal Reserve is aiming for 2%, will be left to another generation of central bankers.[0]
Maintaining a healthy level of inflation could give the central bank additional room to lower interest rates when it wants to stimulate the economy.[2] But too-high inflation could decrease consumers’ purchasing power and increase their uncertainty about how to plan for the future.[2]
0. “CNBC Daily Open: The Fed wants inflation at 2%. But the economy might be fine with higher inflation” CNBC, 21 Feb. 2023, https://www.cnbc.com/2023/02/21/stock-markets-the-economy-might-be-fine-with-inflation-more-than-2percent.html
1. “The curious history of the Federal Reserve’s 2% inflation targeting, explained” Forex Factory, 20 Feb. 2023, https://www.forexfactory.com/news/1206654-the-curious-history-of-the-federal-reserves-2
2. “What Would Happen If the Fed Raised Its Inflation Target?” Chicago Booth Review, 18 Nov. 2021, https://www.chicagobooth.edu/review/what-would-happen-if-fed-raised-its-inflation-target
