Fed's 2 Percent Inflation Target: A Legacy of Greenspan and Bernanke

The Federal Reserve's commitment to a 2 percent inflation target has been a cornerstone of its monetary policy for over a decade. New Fed Chair Kevin Warsh has pledged to restore annual inflation to this mark, despite it being above target for 63 consecutive months.

To understand why the Fed chose this target, let's look back at its history. In 1977, Congress passed the Federal Reserve Reform Act, which formally established the Fed's price-stabilizing role. At the time, annual inflation rates were as high as 14 percent.

Paul Volcker, who led the Fed from 1979 to 1987, began aggressively raising interest rates to curb inflation. However, this move triggered unforeseen consequences, including a recession and a spike in unemployment.