A Timeline of Inflation Targeting

1977-1978: Congress Writes the Dual Mandate

For most of its history the Federal Reserve had no statutory statement of what it was supposed to achieve. The Federal Reserve Reform Act of 1977 changed that, directing the Fed to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. The third goal is generally understood to follow from the first two, which is why the mandate is universally described as a dual mandate. The Full Employment and Balanced Growth Act of 1978, commonly known as Humphrey-Hawkins, added the requirement that the Fed report to Congress on monetary policy twice a year. Notably, Congress specified goals but attached no numbers, leaving the definition of stable prices to the central bank.

1990-1993: New Zealand Invents the Modern Target

The first country to adopt a formal numerical inflation target was New Zealand. The Reserve Bank of New Zealand Act 1989 restructured the central bank around a single objective of price stability and required a public agreement between the government and the governor specifying a target range; the first such agreement took effect in 1990. The design was radical for its time because it made the target explicit, public, and accountable. Canada followed in 1991, the United Kingdom in 1992 after sterling left the European exchange rate mechanism, and Sweden in 1993. Within a decade, inflation targeting had become the dominant framework for advanced-economy central banks, and inflation across those countries fell sharply from 1980s levels.

1999-2007: The American Debate

The United States held out. Alan Greenspan argued against announcing a number, preferring his own working definition that price stability exists when expected changes in the price level do not materially affect household and business decisions, and he valued the flexibility that vagueness preserved. The case for the other side was made in detail by a group of academic economists including Ben Bernanke, Thomas Laubach, Frederic Mishkin, and Adam Posen, whose 1999 book on the international experience with inflation targeting argued that an explicit target anchors expectations without forcing a central bank to ignore employment. When Bernanke became chair in 2006, the FOMC began publishing longer-run projections that functioned as an implicit target while the formal debate continued.

January 2012: The Fed Adopts an Explicit 2 Percent Target

At its meeting in January 2012 the Federal Open Market Committee issued a Statement on Longer-Run Goals and Monetary Policy Strategy, announcing for the first time that it judged inflation at 2 percent per year, as measured by the annual change in the price index for personal consumption expenditures, to be most consistent over the longer run with its statutory mandate. The statement deliberately did not attach a fixed number to maximum employment, on the grounds that the sustainable rate of employment is determined by non-monetary factors and changes over time. The committee committed to reaffirming the statement each January, and it has done so since.

August 2020: Flexible Average Inflation Targeting

After a public review of its framework, the FOMC revised the 2012 statement in August 2020. The most discussed change was the shift to what officials called flexible average inflation targeting: following periods when inflation had run persistently below 2 percent, the committee said it would aim to achieve inflation moderately above 2 percent for some time, so that inflation averaged 2 percent over time and longer-term expectations stayed anchored. A second change concerned employment, with the committee stating that policy would respond to shortfalls from maximum employment rather than to deviations in either direction. The committee also committed to conducting a public review of its framework roughly every five years.