Federal Reserve Chair Jerome Powell reiterated the central bank’s commitment to a 2% inflation target at the Jackson Hole Economic Symposium. Why 2%?
A primary goal of all central banks is to achieve price stability, achieving the lowest inflation rate that is practical over the long term. Low and steady inflation helps reduce losses to consumer purchasing power and creates a predictable economic environment that is conducive to business activity.
While there is no magic number for a long-run inflation goal, there are several reasons why a 2% target is reasonable:
1. Measures of inflation are biased upward. 2% measured inflation implies experienced inflation of about 1%. That’s an enviable goal.
2. A trend inflation target below 2% would mean low interest rates that would give the Fed precious little room to cut rates to offset or prevent a recession.
3. Two percent inflation is likely sufficiently high to avoid deflation, that is falling average prices.
And abandoning the 2% target would undermine the Fed’s hard-won credibility as an inflation fighter.
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