Why the Fed Sticks to Its 2% Inflation Target
The Federal Reserve (Fed) insists on a 2% inflation target primarily to maintain credibility and predictability. Simply put, 2% is considered a ‘middle ground’: low enough to avoid deflation risks and high enough to prevent rapid erosion of currency value.
1. Historical Background
The inflation trauma of the 1970s and '80s led the Fed to prioritize keeping inflation low and stable. Since the 1990s, the 2% target has become an international standard among central banks.
2. Gaining Market Confidence
A clear target helps investors and companies make long-term plans more confidently. If the market believes "the Fed will stick to 2%," expected inflation tends to stay around that level.
3. Why Not 3% or 4%?
Raising the target to 3–4% could ease the burden of government debt, but it also risks a long-term wage-price spiral. It may also undermine trust in the Fed—if the target moves once, it might move again.
4. Criticisms and Challenges
Critics argue that the 2% figure was designed for a past era, and may be too low for today’s world of low growth and high debt. Sticking to this target might sacrifice employment and growth, potentially triggering unnecessary economic slowdowns.
Related post: 2% inflation Impact of 2% vs. 3–4% Inflation Target by the Fed
