Home, Home on the (Inflation) Range, Where the Hawks and Doves Roam

The case for--and the surprising implications of--an inflation range target

I recently had the opportunity to record a live episode of Macro Musings with Raphael Bostic, President of the Federal Reserve Bank of Atlanta. It was a wide-ranging conversation that touched on the Fed’s new framework, its dual mandate, liquidity facilities, artificial intelligence, and more. We even discussed why more central bankers should take up birding as a hobby.

One of the most interesting points President Bostic raised was his view that the Fed should adopt an inflation range target centered around 2 percent. Sticking rigidly to a 2 percent inflation point target, he argued, conveys a false sense of precision. It is an intriguing idea and one I will explore further below.

Before diving into that discussion, though, I want to share the video clip below highlighting President Bostic’s birding hobby. In it, we talk about why birding is not only good therapy for a central banker’s soul, but how it also sharpens pattern recognition, improves decision-making under uncertainty, and fosters humility in assessing a dynamic environment—all essential skills for a successful central banker.

Does the Fed Need an Inflation Range Target?

President Bostic’s openness to an inflation range target is noteworthy. It reflects an awareness that monetary policy operates in an uncertain, shock-prone world where treating 2 percent as a precise control knob may be misleading. His comments also point to the broader questions of how wide should such a range be and what would it accomplish? Here is what he said:

Bostic: In terms of the inflation goals and discussion for target, I actually would be open to using a range. I’ve said this in many settings, but you can only do so many changes. It is a committee of 19 people. You have to pick your spots, and sometimes there’s this illusion of precision that we can move inflation into the third decimal place and that kind of stuff. I don’t really think that’s real, and sometimes that can cause people to, I think, focus on the wrong things. There are some big picture things that matter.

In today’s environment, it’s interesting. We’re at 2.4, 2.6, 2.8, somewhere in that range. People are asking like, is that 2? For me, I think no. My range would be narrower, but it’s a good conversation to have about what are we trying to accomplish and how should things go.

President Bostic also noted that he prefers a relatively narrow inflation range target, roughly 1.75 to 2.25 percent. He favors a narrower band because a wider one, in his view, could risk generating unwanted inflation momentum. For example, if the target range were 1 to 3 percent and actual inflation rose from 1.5 to 2.8 percent, such a sharp move—while still within the range—might create upward momentum that would not stop at 3 percent. This is a reasonable concern and one I will return to later.

Other Experiences with Inflation Range Targets

For now, though, I want to focus on how to determine a proper inflation range for the Fed. A useful starting point is to look at how other central banks have implemented inflation target ranges and the reasoning behind them. The table below lists several examples.

The Bank of Canada (BoC) calls its approach an “inflation control range” of 1–3 percent, centered on 2 percent over the medium run. The BoC notes that it “can’t—and shouldn’t—respond to every blip on the [inflation] radar,” but instead must “filter out the temporary part of inflation.” The range allows the BoC to ignore the bulk of short-lived price movements and maintain focus on underlying inflation pressures.

This transitory component of inflation typically arises from temporary supply shocks, as explained by the Reserve Bank of New Zealand (RBNZ): “energy and food prices tend to respond to global market conditions and can rise and fall quickly and significantly.” Its 1–3 percent target band serves precisely this purpose: to look through temporary supply disturbances and maintain a medium-term inflation anchor.

The Reserve Bank of Australia (RBA) takes a similar view. It “distinguishes between temporary and persistent changes in inflation” and regards its 2–3 percent target range as wide enough to accommodate normal supply-side volatility. Likewise, the Bank of Israel explicitly cautions that “shocks affecting the rate of inflation in the short term do sometimes occur, but reacting with sharp changes in the interest rate may undermine stability… the return of inflation to the target after such a shock should be one or two years, or even longer if necessary.”

For all these central banks, an inflation range is not a sign of policy laxity, but a recognition of economic reality. The range allows them to look through supply-driven volatility in inflation while keeping medium-run inflation expectations anchored. In effect, the chosen bands are calibrated to encompass the typical, historically-observed fluctuations in inflation caused by supply shocks.

Estimating an Inflation Range Target for the Fed

If other central banks have adopted inflation range targets to “look through” temporary supply shocks, then the natural next question is how wide such a range should be for the Federal Reserve. In other words, how much room should the Fed allow for short-run inflation variation that reflects supply disturbances rather than shifts in underlying demand?

One way to answer this is to look at the historical relationship between the Fed’s preferred inflation measure—headline PCE inflation—and various trend or underlying PCE inflation measures. The logic is straightforward: the difference between headline and trend inflation should largely reflect the influence of temporary supply shocks. When energy prices spike, when food prices swing, or when global supply chains jam, headline PCE deviates from its underlying trend. Once these disturbances fade, the two series converge again.

The table below reports the 90th and 10th percentiles of the spread between headline PCE inflation and four measures of underlying PCE inflation—core PCE, the Dallas Fed’s trimmed mean PCE, the Cleveland Fed’s median PCE, and the New York Fed’s multivariate core PCE—over two sample periods: 2000–2025 and 2010–2025. These percentiles should be roughly capturing the range within which supply-driven deviations in inflation have historically occurred.

Across all four measures and both sample windows, the 90th and 10th percentile spreads average about ±1 percentage point. This implies that in normal times, supply shocks have pushed headline PCE roughly one percentage point above or below its underlying trend. In other words, if the Fed’s target is 2 percent inflation, a historically reasonable “tolerance band” would run from about 1 to 3 percent.

This empirical finding lines up remarkably well with the ranges already used by other inflation-targeting central banks, such as the Bank of Canada, the Reserve Bank of New Zealand, and the Bank of Israel. This similarity is somewhat surprising, since these institutions operate in small, open economies that are arguably more exposed to commodity and trade shocks than the United States. Yet the close correspondence between my estimated U.S. range and the ranges used by these central banks suggests that the impact of temporary supply shocks under well-anchored regimes may be more universal than commonly assumed.

In that light, the Fed’s formal adoption of a 1–3 percent range target would simply make explicit what these peers have already recognized: that effective inflation targeting requires the flexibility to look through temporary supply disturbances while keeping expectations firmly centered on the 2 percent midpoint over the medium run.

A Surprising Implication of an Inflation Range Target

Let’s now return to President Bostic’s worry that adopting a wider 1–3 percent inflation range target could create destabilizing momentum in inflation. To think through this concern, it helps to outline a surprising implication of having an inflation range that explicitly allows the Fed to look through supply shocks.

To that end, let’s define a few terms. Inflation at time t, π_t , can be expressed as the sum of its target value, π^*, and temporary supply-driven component, π_t^S:

\(\pi_t = \pi^* + \pi_t^{s}\)

Real GDP growth, Δy_t , equals potential real GDP growth, Δy_t^P_, plus the temporary supply disturbance, e_t^S:

\(\Delta y_t = \Delta y_t^{P} + e_t^{s}\)

Nominal GDP growth, g^N_t is simply the sum of inflation and real GDP growth:

\(g_t^{N} = \pi_t + \Delta y_t \)

Now combining these relationships yields:

\( g_t^{N} = (\pi^* + \pi_t^{s}) + (\Delta y_t^{P} + e_t^{s}) = (\pi^* + \Delta y_t^{P}) + (\pi_t^{s} + e_t^{s})\)

Note that supply shocks tend to move inflation and output in opposite directions. Given a properly calibrated inflation target range, these movements should roughly offset each other so that:

\(\text{Inflation Range Target}\Rightarrow ( \pi_t^{s} + e_t^{s})\approx0\Rightarrow \boxed{\,g_t^{N} \approx \pi^* + \Delta y_t^{P}\,}\)

The surprising result, then, is that an inflation range target designed to accommodate supply shocks is functionally equivalent to a nominal GDP target.

This insight provides a response to Bostic’s concern about momentum. A well-calibrated range, paired with NGDP monitoring, gives the Fed a natural cross-check. If nominal spending growth begins to run persistently above the sum of 2 percent inflation and potential real growth, that would indicate excess aggregate demand and justify tightening. Conversely, if NGDP growth remains on target, then short-run inflation deviations are simply noise from temporary supply shocks. It’s as if there is a two-for-one deal with monetary policy targeting: an inflation range that naturally stabilizes nominal spending. In this way, tracking NGDP growth alongside an inflation range creates a self-correcting, flexible framework—one that can see through supply disturbances without letting inflation drift out of control. Bostic can rest assured that such an approach would not unleash inflationary momentum, but instead anchor expectations even more firmly by uniting flexibility with discipline.

Conclusion

Raphael Bostic’s openness to an inflation range target reflects a healthy realism about how monetary policy actually works in a world of shocks, uncertainty, and imperfect control. No central bank can fine-tune inflation to the second or even first decimal place, and pretending otherwise risks overreacting to noise while missing the signal.

A well-calibrated inflation range—say, 1 to 3 percent—would make that realism explicit. It would acknowledge that inflation naturally fluctuates with supply shocks while preserving the Fed’s long-run commitment to a 2 percent target over the medium run. In doing so, it would also anchor policy around a deeper and more stable objective: steady nominal spending growth.

That, in the end, is the hidden virtue of an inflation range target. It offers the flexibility to see through temporary turbulence yet retains the discipline to keep expectations firmly anchored. Or, as President Bostic might appreciate, it gives the Fed a better view of the monetary landscape—one that’s attuned to both the noise and the song of the economy.