Why Do We Have Inflation Targets?

At a Glance

  • The targets go back 30 years, but a former Fed Governor says they need not be so specific

The Federal Reserve has an inflation target of 2.0 percent. In June 2018, they reached it for the first time since 2012, helping solidify the decision to slowly raise interest rates. The thinking behind an inflation target is that it will help stabilize prices.

Fed Governor Kevin Warsh calls inflation targets “a broad and good thing,” but says the Fed should be less specific in its goal and instead focused on the more general goal of price stability.

To Warsh, the specificity of the 2.0 percent target suggests another question. “Are we running an economy consistent or inconsistent with a broad sense of price stability?”

The Fed’s Independence

The Federal Reserve is an independent body that is intended to be free from politics. Warsh, who served as a Fed governor during the financial crisis, says that is a necessary thing, but that the Fed should always have the long-term in mind.

“The world needs to believe that the Fed is calling it as it sees it, and after all that’s why Congress gave Fed Governors 14 year terms, that’s why the institution was given the perspective to look over the horizon, past the next election cycle, past the next year.”

Watch Warsh’s full remarks in the video above.

Evan Peterson is director of corporate marketing at CME Group and managing editor of OpenMarkets.

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