The Fed’s Inflation Target Keeps Slipping Farther Into The Future

Key Takeaways

• Federal Reserve officials pushed back the date they expect inflation to descend to a 2% annual rate.

• It was the fifth time since 2021 that the Federal Open Market Committee has extended the timeline to meet its inflation goal.

• Although inflation has fallen from its 2022 peak, a return to the 2% target has proved elusive.

Victory in the Federal Reserve’s war on inflation is just over two years away. Will it always be?

Officials at the Fed predicted inflation, as measured by the Personal Consumption Expenditures price index, will finally fall to the central bank’s target of a 2% annual increase in 2029. That’s later than the Federal Open Market Committee’s projections in June.

Fed officials revised their forecasts on Wednesday after recent economic data showed inflation remains stubbornly high at 3.7% in July. With diesel prices surging to record highs because of the Iran war, inflation seems unlikely to subside on its own. The central bank raised its key interest rate by a quarter-point this week in a bid to blunt the steeper-than-usual consumer price increases.

What This Means For The Economy

Financial markets can expect interest rates to remain higher for longer as the Fed wages an extended campaign to bring down inflation.

The figure shows the median projection from Federal Open Market Committee participants. Fed Chair Kevin Warsh has not taken part in the exercise so far in his tenure. It was the sixth time since 2021 that the Fed has pushed back the long-awaited date.

The Federal Reserve has a mandate from Congress to maintain “price stability” in the economy, and since 2012, has explicitly defined price stability as a 2% annual inflation rate.

Inflation Goal Is a Moving Target

Inflation had stayed near or under the Fed’s 2% target in the years leading up to the pandemic. Then, in March 2021, government stimulus spending and the Fed’s easy-money policies cranked up demand in an economy still snarled by pandemic-related supply chain disruptions. It was a recipe for inflation to take off, and it did.

In March 2021, annual PCE inflation suddenly jumped to 2.7%, its highest in nearly a decade. That same month, Fed officials forecast the outburst would quickly subside, returning to the 2% target the very next year. Instead, it just kept rising. The next time officials projected inflation, in June 2021, they said it would stay above 2% until after 2023. In September, that date moved again to after 2024. And so on.

Although inflation has fallen from its recent peak in 2022, it’s hovered stubbornly above the ever-elusive 2% mark, as tariffs, the Iran war, and other setbacks have kept higher inflation gnawing at household budgets and the overall economy.