Episode 879: The Secret Target : Planet Money The Federal Reserve spends a lot of effort trying to target the level of inflation to about 2 percent. Why? Because tiny New Zealand did it first.

Episode 879: The Secret Target

Mark Wilson/Getty Images
Former Federal Reserve Board Chairs Janet Yellen, Paul Volker, Alan Greenspan and Ben Bernanke.
Mark Wilson/Getty Images

Their plan was dangerous, risky, and extremely unpopular. But America — and much of the rest of the world — copied them anyway.

Today on the show, how New Zealand changed the way governments all over the world run their economies. This tiny country created an idea called inflation targeting.

Inflation is like a spice. None is boring. A little goes a long way. And too much can ruin everything. So governments spend a lot of energy trying to keep inflation at just the right level. They want prices to rise every year, but just a little. In the United States, the Federal Reserve uses a two percent target.

This seems totally reasonable and obvious. Find the right level, make it happen. But for the longest time, that's not how it worked. Inflation was an untamed beast.

Warning: This episode involves a dramatic re-enactment of a secret Federal Reserve meeting.

Music: My Life With You and Hans Pucket's "Comfort"

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