Key Figures Behind the 2 Percent Inflation Target

Paul Volcker (1927-2019)

Volcker never announced a numerical target, but inflation targeting is unimaginable without what he did first. By accepting two recessions and unemployment above ten percent to bring inflation down from double digits, he demonstrated that a central bank could make its commitment to price stability believable — and that the belief itself is the valuable asset. The economics literature that followed formalised this as the problem of credibility: if the public expects the central bank to tolerate inflation, wage and price setting will build that expectation in, and disinflation becomes far more costly. Every later framework, including the explicit target, is an attempt to secure the same credibility institutionally rather than through the reputation of one individual.

Don Brash (born 1940)

Governor of the Reserve Bank of New Zealand from 1988 to 2002 and the central banker who implemented the world's first formal inflation-targeting regime. Under the Reserve Bank of New Zealand Act 1989, the governor signed a public agreement with the government committing the bank to keep inflation inside a specified range, with the governor personally accountable for the result. New Zealand's inflation fell steeply and the framework attracted international attention out of all proportion to the size of the economy. Brash's regime established the three features that define inflation targeting everywhere it was subsequently adopted: an explicit number, published accountability, and operational independence in choosing how to hit it.

Alan Greenspan (born 1926)

The most influential opponent of an explicit target during the years when other central banks were adopting them. Greenspan argued that price stability was best defined as a state in which expected inflation no longer materially influences household and business decisions, and he was reluctant to give up the flexibility that came with leaving the definition unquantified. His view carried enormous weight because his record was strong: inflation stayed low through his tenure without a published number. Critics answered that the arrangement depended on the personal credibility of one chair and left no framework behind. The 2012 statement can be read as the institution deciding that the anchor should belong to the committee rather than to an individual.

Ben Bernanke (born 1953)

The intellectual architect of the American target. Before joining the Fed, Bernanke co-authored a 1999 study of international experience with inflation targeting that argued explicitly for a framework of constrained discretion: a public numerical goal to anchor expectations, combined with freedom to respond to shocks in the short run. He advocated the idea as a governor, kept pressing it as chair, and the January 2012 statement was announced under his leadership. Bernanke also argued the deflation side of the case — that a target above zero provides a buffer against falling prices and preserves room to cut rates — a concern that his own experience at the effective lower bound after 2008 made concrete.

Janet Yellen (born 1946) and Jerome Powell (born 1953)

Yellen chaired the FOMC subcommittee on communications that developed the language eventually adopted in January 2012, and as a longtime advocate of taking the employment half of the mandate seriously she was central to the decision not to attach a fixed number to maximum employment. As chair from 2014 to 2018 she then had to defend the target during a stretch when inflation ran persistently below it. Powell, chair from 2018, led the framework review that produced the August 2020 revision to flexible average inflation targeting, and afterward had to manage the first serious test of the framework from the other direction when inflation rose sharply in 2021 and 2022.