The Fed Has Targeted 2% Inflation. Should It Aim Higher?

The transcript shows that he said “zero” was the proper target if “inflation was correctly measured.” But it is difficult to measure inflation accurately, as everyone in the room acknowledged. So Ms. Yellen said, “Improperly measured, I believe that heading toward 2 percent inflation would be a good idea, and that we should do so in a slow fashion, looking at what happens along the way.”

That, essentially, was that.

Other Fed members agreed, and the 2 percent target became enshrined in Fed policy, though only in a clandestine way. Mr. Greenspan did not want his hands tied. “I will tell you that if the 2 percent inflation figure gets out of this room, it is going to create more problems for us than I think any of you might anticipate,” he said, according to the transcript.

In those days, Mr. Greenspan and the Fed favored a style of communication that even he  described as opaque. In testimony before Congress in 1987, he was droll but on the mark. “Since I’ve become a central banker, I’ve learned to mumble with great incoherence,” he said. “If I seem unduly clear to you, you must have misunderstood what I said.”

It wasn’t until 2000 that the Fed began issuing regular “forward guidance” after its meetings, projecting where it expected that the economy and inflation would be headed. By now, Mr. Powell’s news conferences have become routine. But it’s worth remembering that it wasn’t until 2011, well into Ben S. Bernanke’s tenure as Fed chair, that the central bank broke with the Volcker and Greenspan tradition of extreme circumspection and held its first regularly scheduled news conference.

In 2012, it finally embraced the 2 percent target openly and formally, and made it part of the Fed’s practice of “forward guidance.” Come what may, over the long run, the Fed would veer toward its North Star, the 2 percent inflation target.