Continuity and Change in the Federal Reserve's Perspective on Price Stability

Abstract

We examined statements made by Federal Reserve leadership since the early 1950s and established there has been considerable continuity in policymakers’ perceptions of the benefits of price stability. Policymakers have consistently contended that deviations from price stability give rise to greater cyclical instability, and they have also frequently suggested that potential output is significantly lowered by inflation. The recurrent support for price stability that comes through in these statements implies that it is invalid to interpret deviations from price stability in the U.S. economy as an indication that policymakers seek inflation.

Introduction

Along with the goal of maximum employment, price stability is a statutory objective of the Federal Reserve, as part of the dual mandate assigned to monetary policy. In pursuing this dual mandate, the Federal Reserve’s Federal Open Market Committee (FOMC) has specified a longer-run inflation rate of 2 percent (in personal consumption expenditures, PCE, prices) as its price-stability goal. This numerical goal is set out in the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy, which is also known as the Committee’s “consensus statement.” This statement was originally released in 2012, and the 2 percent goal has been reaffirmed over subsequent years in successive versions of the statement. (See Federal Open Market Committee, 2012, 2024.)

Notably, considerable judgment, involving economic analysis, underlies the FOMC’s choice of the 2 percent goal. Underpinning that 2 percent goal, therefore, is an assessment of the implications of different longer-run inflation rates for economic performance. That is, policymakers took a stand on the structural behavior of the U.S. economy. When the 2 percent objective was announced, Federal Reserve policymakers indicated that this number was deemed to be the rate most likely to help secure the achievement of the Federal Reserve’s other macroeconomic goal of maximum employment.2 Consequently, 2 percent was judged to be the numerical inflation objective most consistent with the Federal Reserve’s overall mandate.

That 2012 assessment motivates our examination in this article of the views that the Federal Reserve held over the pre-2012 period on the same issue. We document continuity and change in the Federal Reserve’s perspective on price stability by analyzing how policymakers’ position on the relationship between sustained rates of inflation and other economic variables has evolved. We put the FOMC’s modern-day inflation goal into a longer-term context by examining the Federal Reserve’s stance over time on the merits of price stability.