What Is the Fed's Real Inflation Target?

The Federal Reserve sets monetary policy in the United States with two main goals in mind. Its first goal is to provide for stable prices over time, which is to say the Fed has the job of managing financial conditions in the U.S. economy to keep inflation under control. Its second goal is to use the financial tools at its disposal to maximize employment in the U.S. economy.

For the Fed, these are more than just goals. The U.S. Congress specifically mandates the Federal Reserve do these two things.

Of these two jobs, Federal Reserve officials have been mostly concerned about combatting inflation since 2021, when the Biden administration unleashed high inflation with its fiscal policies. At the time, the Fed chose to let President Biden’s inflation rip because they committed to get the economy back to full employment during 2020′s coronavirus pandemic.

But once that mark was hit in early 2022, they resumed pursuing their first task of inflation control. Before the pandemic, the Fed got to be pretty good at managing inflation, aiming to keep it under 2% and from January 2000 through March 2021, inflation measured by the Consumer Price Index averaged 1.7% annualized growth.

Letting President Biden’s inflation rip resulted in consumer prices growing at a annualized rate of 9.1%. That regime lasted up until 2022 when the Fed finally made combatting the runaway inflation they allowed a priority and started using their main tool of setting interest rates to make inflation grow at their desired target rate by hiking the Federal Funds Rate. Which they did slowly at first, then aggressively until they achieved the inflation rate they desired.

But what rate did they desire? Federal Reserve officials frequently toss out the idea they want prices to rise on average either around or no more than 2% in a year, the inflation target they informally set for themselves in 1996 and officially adopted in 2012.

Consumer price data since the Fed’s 2022 interest rate hikes began having an effect on the rate of inflation suggests they are trying to hit a 3% inflation target. The following chart reveals they’ve never come close to their old 2% inflation target in all the years since.

At this point, we should point out the Fed is targeting Personal Consumption Expenditures, which is a different inflation measure. But as you can see from a similar chart created by Federal Reserve Bank of St. Louis’ Fernando M. Martin, the results are within a few tenths of a percent over the period in which inflation was steady. And we suspect they would be even closer to the Consumer Price inflation figures we found had Martin calculated the annualized trends over the more granular periods we did rather than over whole calendar years [1].

The low variation of the growth of the PCE and CPI indexes during the periods when the Fed has actively managed inflation is the tell-tale indication the Fed is hitting its inflation target. Since mid-2022, the data indicates they’ve really been aiming at a 3% inflation target.

Martin has additional observations worth noting:

Following the inflation surge during the pandemic, prices have since been increasing at a pace significantly faster than in the prepandemic period. Just like during the inflation surge, the above-target inflation period is broad-based and not attributable to a few sectors or categories. These facts suggest the U.S. economy is in a new above-target inflation regime, which mirrors the below-target inflation regime of the prepandemic era. There are many potential explanations for this regime shift, such as the fiscal outlook. The recent imposition of tariffs has so far had a modest impact on prices and, thus, is unlikely to have contributed significantly to the current regime.

There’s an old saying that “persistent inflation is always and everywhere a monetary phenomenon”. Rest assured that today’s higher than 2% inflation is a direct result of the Fed’s monetary policies and they are hitting the inflation target they really want to hit.

Notes

[1] Martin’s annual inflation rates reflect his analytical approach, which is most representative when the inflation rate is steady over the entire period in question. In the case of the high inflation period within 2021-2022, Martin’s whole-year inflation rate understates the rate of inflation experienced by Americans within it because it includes data from the months before inflation got out of hand and data from the months after the Fed got it back down to where they appear to want it.

References

U.S. Department of Labor Bureau of Labor Statistics. Consumer Price Index, All Urban Consumers – (CPI-U), Not Seasonally Adjusted, U.S. City Average, All Items, 1982-84=100. Accessed 25 January 2026.

Financial Forecast Center. U.S. CPI Forecast. . Accessed 25 January 2026.

Fernando M. Martin. Is the U.S. in an Above-Target Inflation Regime? Federal Reserve Bank of St. Louis On the Economy Blog. [Online Article]. 17 October 2025.

Image Credit: Microsoft Copilot Designer. Prompt: “An editorial cartoon showing three Federal Reserve officials in suits playing darts. On the wall are two round targets: one labeled ’2% INFLATION’ with no darts in it, and another labeled ’3% INFLATION’ with many darts clustered around its bullseye. One official, an older man with glasses and a beard, is holding a dart and speaking to the others. His speech bubble says: ‘I THINK WE’RE GETTING CLOSER…’ The other two officials wear jackets labeled ‘FED’ and look on with concern. Style is pen-and-ink with cross-hatching and bold lines”.