The Fed’s inflation target and the background of its announcement

In the first stage of the crisis, the Federal Reserve (Fed) rapidly embarked on interest rate cuts followed by several rounds of substantial quantitative easing. However, the marked monetary easing and the persistently low interest rates triggered mounting fears of inflation, calling into question the Fed’s commitment to medium-term price stability. In response to criticism and to the risks relating to monetary policy, in January 2012 the Fed announced an explicit inflation target of 2 per cent to exploit the fact that a numerical inflation target improves the transparency of the central bank, helps to anchor inflation expectations and fosters consensus about the definition of price stability among policymakers. With this move, the Fed added key elements of inflation targeting to its monetary strategy. The announcement confirmed that inflation targeting is becoming increasingly popular and may be an attractive and efficient monetary strategy, even for the largest central banks.