FOMC members had lower inflation target before recession, researchers find

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Members of the Federal Open Market Committee raised their inflation target from about 1.5% in 2000 to 2% after the Great Recession, Federal Reserve Bank of San Francisco researchers said, perhaps because hitting zero lower bound showed the benefits of a higher goal.

Using transcripts from meetings, Adam Shapiro, a research advisor in the Bank’s Economic Research Department, and Daniel J. Wilson, vice president of the department, determined “participants generally expressed a preference for an inflation target around 1.5% from 2000 to around 2007.” But, by 2009 after the Great Recession, “the consensus had clearly shifted to 2%,” which became the FOMC’s official inflation target.

“One plausible explanation for this shift is that hitting the zero lower bound in a low inflation environment brought the potential benefits of a higher inflation target to the forefront,” the authors write in an Economic Letter. “As many academic studies and even FOMC participants have discussed, a higher inflation target could potentially lower the risk of hitting the zero lower bound in future recessions.”

Also, inflation from 2000-2007 “was considerably above the 1.5% consensus preferred target,” the authors say. But, because the 1.5% figure was favored by individuals, “the committee’s monetary policy actions may be consistent with a different target,” so it doesn’t necessarily mean the FOMC missed its inflation objective during that time.

Additionally, Shapiro and Wilson write, “the FOMC’s objectives may have included higher economic growth in addition to having inflation near its target … With such multiple objectives, achieving higher growth over a given period could involve some trade-off with inflation being above target.”

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Monetary policy Federal Reserve Federal Reserve Bank of San Francisco FOMC
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