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What Is “Average Inflation Targeting”?

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What Is “Average Inflation Targeting”?

Brookings Institution,

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Persistently low inflation is challenging the Federal Reserve to come up with new tools.

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8

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  • Overview
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The Federal Reserve’s pursuit of its dual mandate to maintain stable prices and robust employment rests on controlling inflation. Since 2012, the Fed has earmarked 2% as the inflation rate that best achieves price stability. But that level has proven elusive. In this astute analysis, economist David Wessel offers policy makers and financial professionals background on the choice of this rate and its supporting architecture. He explores the reasons why Fed officials are now considering revamping their inflation targeting approaches.

Summary

In 2012, the Federal Reserve codified a 2% threshold as the standard for inflation.

The practice of targeting inflation began in the 1980s, when the Fed sought a straightforward standard by which to tame runaway price increases. In 1996, central bankers monitored actual inflation at 3% and agreed on 2% as the appropriate level at which to stabilize prices. By 2012, the central bank officially adopted the 2% figure as the ideal rate that would achieve the Fed’s overarching mandates for stable prices and strong employment.

Policy makers gauge the rate of inflation&#...

About the Author

David Wessel is a senior fellow at the Brookings Institution and the director of its Hutchins Center on Fiscal and Monetary Policy.

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