Federal Reserve Officials Propose Inflation Target Range

Three Federal Reserve officials have recently voiced their support for transitioning from a fixed 2% inflation target to a target range. These officials include a Federal Reserve Governor, another Federal Reserve Governor, and the Atlanta Federal Reserve President, who all discussed this idea in various forums this week. Their comments follow the Federal Reserve's completion of its five-year policy framework review in August, which had previously ruled out any changes to the inflation target.

The Federal Reserve's preferred measure of inflation has exceeded the 2% target for the past four and a half years. This increase is partly due to economic disruptions caused by the COVID-19 pandemic and tariffs imposed by Donald Trump on global trading partners. Prior to 2020, the Federal Reserve was primarily concerned with inflation rates that were consistently below the target, raising concerns among policymakers that this trend could hinder their ability to raise interest rates to more normal levels.

One of the officials, who is an ally of Trump and a White House economist, joined the Federal Reserve as a temporary governor on September 16. This official stated that a very clear inflation target could lead to excessive micromanagement and suggested that the Federal Reserve should remain open to other options. The official proposed returning to the Federal Reserve's pre-2012 approach of pursuing "low and stable prices" without a specific numerical target, but emphasized that officials must first restore the inflation rate to 2% before considering any adjustments.

Another official, who was appointed by Trump as a Federal Reserve governor in 2018 and is one of the candidates being considered to replace the current Federal Reserve Chairman, echoed similar sentiments. This official noted that other countries use target ranges, which can help avoid excessive focus on specific inflation numbers. While downplaying the likelihood of an imminent major shift, the official emphasized the importance of ongoing dialogue.

The Atlanta Federal Reserve President also expressed a willingness to adopt a range-based approach to discussing inflation targets. When asked about a preferred inflation range, this official suggested a narrow range of approximately 1.75% to 2.25%, emphasizing that the range should be tight enough to prevent inflation from gaining momentum.