The Fed’s Inflation Goal Is Completely Arbitrary – By Santul Nerkar (FiveThirtyEight) / Mar 9, 2023
Over the past 18 months, inflation has dominated our understanding of the pandemic economy. Americans have endured the highest yearly price increases in four decades, from soup to nuts — literally. Even now, as experts and forecasters worry that the economy might dip into recession, observers also remain dismayed about the relative stickiness of inflation. Through it all, we’ve heard an almost mantra-like refrain from the Federal Reserve: We’re still not close to 2 percent inflation.
It might seem odd, then, that this ostensibly carefully crafted rule of monetary policy, the goal of arguably the most powerful technocrats in the world, is sort of … arbitrary. In fact, there’s little empirical evidence to suggest that a long-run inflation target of 2 percent is the platonic ideal for balancing the Fed’s “dual mandate” of price stability and maximum employment. So as the Fed continues to raise interest rates with the stated goal of bringing us back down to 2 percent inflation, it’s worth reexamining this long-held “rule of economics.” Despite its widespread acceptance, there’s a strong case that we should understand it as a product of history — and relegate it to the dustbin accordingly.
“The idea that inflation should be relatively low and relatively stable is certainly a reasonable position to have,” said Jonathan Kirshner, a professor of political science at Boston College who studies the politics of inflation. “But there’s nothing magic or special about 2 percent.”
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