US Treasury Secretary Scott Bessent has suggested shifting the Federal Reserve from a fixed two-percent inflation target to a broader range. The change may seem minor, but it risks redefining accountability at a moment when inflation has already strained public trust.
Bessent floated the proposal on December 22 during an appearance on the All-In Podcast.
“This idea that we can have this decimal point certainty is just absurd,” he declared.
It would be a major shift in policy if the Fed ended its fixed inflation target mandate.
While the Fed officially adopted the two-percent inflation target in 2012, governors long considered inflation control a top priority. It was seen by supporters as a way to increase transparency and – more importantly – keep the financial markets stable.
However, the US hasn’t stayed under its two-percent inflation target for almost five years.
The inflation target range, argued Bessent, would give the Fed some wiggle room. He said a 1.5 percent to 2.5 percent spectrum or a one-percent to three-percent spectrum made more sense. If the US remained within its inflation target, financial markets would likely be more stable, reducing the risk that investors get spooked if inflation rose by a percentage point or two.
Economists say Bessent’s proposal has merit, given the current economic conditions.
Dr. David Beckworth, a senior research fellow at the Mercatus Center at George Mason University, argues that a specific inflation point target tends to give a false sense of security and stability. Supply shocks regularly hit economies – influencing inflation – but not affecting the trend rate of inflation, he said. The trend rate is what’s influenced by Fed monetary policies.
Moving to an inflation target range, Beckworth said, would acknowledge the limits of monetary policy while still anchoring the economy.
“As long as the average inflation rate over time is near the center of the inflation target range, then this is a great approach in my view,” he said.
This view is shared by some inside the Fed. Raphael Bostic, president of the Federal Reserve Bank of Atlanta, has said he is open to narrow inflation range targets – such as 1.75 percent to 2.25 percent – warning that precision inflation targets can obscure big-picture issues.
“There’s this illusion of precision that we can move inflation into the third decimal place and that kind of stuff,” he said while admitting that an overly wide range could allow inflation to drift higher.
That’s why free market economists like Dr. Steve H. Hanke have encouraged a lower spectrum – between 0 percent and two percent – because it keeps the Fed committed to price stability.
Using an inflation range instead of a fixed target isn’t an unusual proposal, and something that is used in other countries.
Inflation ranges are not a novel idea. Countries including New Zealand, Canada, and Australia adopted them in the early 1990s as part of a plan to stabilize prices.
In New Zealand, the change coincided with reforms that established central bank independence after years of volatile inflation driven by short-term political motivation. The inflation spectrum allowed central bankers the ability to focus on long-term results without political intervention.
Canada and Australia adopted similar frameworks after experiencing higher inflation. Those moves helped lower or stabilize prices and encouraged institutional independence without interference from politicians.
Inflation remained broadly stable in all three countries with the highest spikes occurring after the COVID pandemic. By being focused on the specific goal of lowering inflation, the central banks were able to provide consistency even when governments changed from one political party to the next.
This is the conundrum the Fed faces should it decide to change policy. The two-percent framework allows the public, Congress, and markets to understand policy outcomes and call for correction.
The line is blurred under a more flexible framework. When the Fed adopted a flexible average inflation targeting scheme in 2020, it allowed policymakers to average the two-percent inflation target over an unknown period of time. That flexibility made it easier for rising inflation to be framed as temporary, instead of evidence that policy had drifted off course.
This is why the timing of Bessent’s call for an inflation spectrum raises questions. Such a shift would make more sense if current frameworks were failing in the midst of a massive financial crisis. When inflation surged after the pandemic, the Federal Reserve eventually responded by raising interest rates, correcting a policy failure of its own making.
With an economy instead limping along under persistent inflation, any change risks being interpreted as moving the goalposts to avoid criticism. That perception further undermines trust in the Federal Reserve rather than restoring it.
With the Fed’s reputation damaged from policy decisions dating back to the 2008 financial crisis – and exacerbated by its post-COVID policy and persistent inflation – questions remain about the central bank’s competence.
Economists say any decision to shift from a fixed target to the spectrum would look like giving up on the inflation fight.
“The premise can’t simply be that it’s too hard to come back to two-percent so it’s okay to adopt a wide window of acceptable inflation,” observed Jai Kedia, a research fellow at the Center for Monetary and Financial Alternatives at the Cato Institute.
Another concern involves potential White House interference in the Fed’s operations – including President Donald Trump’s criticism of Fed Chair Jerome Powell and attempted firing of Fed Governor Lisa Cook.
Bessent has said he believes the Treasury Department deserves a say on Fed policy, recalling the Fed-White House relationship during World War II. That ignores why the relationship was broken up – the influence the Franklin Delano Roosevelt administration exerted over Fed monetary policy. When the Fed attempted to lower inflation following the war, the Truman administration not only pressured Fed governors but also lied to the public.
This is the danger that more White House interference into the Federal Reserve invites.
Economists expressed concerns that any move to adopt an inflation spectrum would be moving the goalposts to appease the White House.
“If a change were made — regardless of what it was — the public would think that the Fed was buckling under President Trump and playing games,” warned Hanke.
That conundrum hasn’t been lost on Bessent. He suggested adopting the inflation spectrum when the two-percent mandate was reached. Bessent believed that would happen sooner rather than later but did not give an exact timeline.
The Fed is not expected to review its framework until 2031.
There are serious, good-faith reasons to debate an inflation spectrum in theory – after the end of the Trump administration. Doing it now risks damaging institutional trust in the Federal Reserve when its credibility is needed most, as it faces pressure to ignore inflation and lower interest rates.
