Inflation Policy: The Inflation Limit Isn’t 2%

Since the Fed announced some years ago that its goal was to raise inflation to 2%, many people have interpreted that to mean the Fed will tighten policy significantly once inflation reached 2%. As this article makes clear, that’s not the case. The Fed wants to see sustainable inflation of at least 2%. It’s going to let inflation drift higher than 2%, and maintaining economic growth is its real priority.

That suggests investors’ fears that U.S. central bankers will react aggressively to signs of stirring price pressures are misplaced. Meyer, who now heads consultants Monetary Policy Analytics in Washington, does see the Fed raising interest rates four times this year — one more than policy makers projected in December — but said that’s likely the limit.

“Two and a quarter percent inflation isn’t going to scare anybody” at the Fed, said Roberto Perli, a partner at Cornerstone Macro LLC in Washington, who sees three rate hikes this year. “Two and a half percent is kind of the boundary,” the former Fed economist added.