By Megan Leonhardt
The great "Oracle of Omaha" has been right about many things, but when Warren Buffett floated lowering the inflation target to zero on Tuesday, he got it wrong.
The Federal Reserve's dual mandate is maximum employment and price stability. In service of keeping price growth stable, the central bank has set an inflation target of 2%. But it's a goal that the Fed hasn't been able to achieve in more than five years.
While some economists and those in the Trump administration have contended that the target needs to be raised to 3%, Berkshire Hathaway's chairman and former CEO said Tuesday that he thinks even the current 2% goal is too high. In fact, he'd be in favor of targeting no inflation.
"I wish they had a zero inflation target," Buffett told CNBC. "I mean, once you start saying you're going to tolerate 2%, that compounds pretty dramatically over time -- and you're saying to people if you're getting less than 2% on your money, you're going backwards."
Zero percent inflation, however, is not a good target. If that was the Fed's goal, it could create a higher risk of deflation, which typically precedes an economic downturn. And such a target would also likely reduce the Fed's monetary policy flexibility.
The Fed adopted an explicit inflation target of 2%, as measured by the annual change in the personal consumption expenditures, or PCE, price index, in January 2012 and re-affirmed that target in January 2026. Currently headline PCE inflation measured 2.8% year over year in January. February's data will be released April 9.
In most cases, the 2% target provides a bit of cushion for Fed officials, particularly in the case of a recession. When there are economic shocks, consumer demand typically falls, leading to slower inflation. A 0% target leaves little room for error since even a minor shock could result in deflation, or falling prices -- which is arguably more problematic than inflation.
"Zero sounds great, but it could potentially then get into a deflationary cycle," Patrick Harker, former Philadelphia Fed president and now a professor at the Wharton School, said in September. "That's why most central banks aim for about 2%."
For example, the Fed aggressively cut the federal-funds rate from 5.25% in September 2007 to a near-zero range of 0%-0.25% by December 2008. If the inflation rate had been zero, these rapid rate reductions would have effectively made real interest rates negative.
Another big benefit of maintaining a positive inflation target is there's evidence that it improves labor market efficiencies. Modest inflation tends to reduce employers' need to cut workers' nominal wages during economic downturns. And, in fact, it is easier to offer small raises when inflation is higher -- which keeps real wage growth suppressed and helps defray some labor cost and reduce the need for mass layoffs.
The debate around the appropriate inflation target has been raging for years. In the late 1990s, for example, Congress was considering amending the Fed's mandate exclusively to price stability through the introduction of the Economic Growth and Price Stability Act.
At the time, the Brookings Institution came out against the zero percent inflation target, saying that this would have "large, real costs to the American economy." Researchers estimated that it would incite higher unemployment and create a drag of 1% to 3% on annual gross domestic product growth.
Additionally, changing the inflation target, either higher or lower, does threaten Fed credibility -- especially since the central bank has not been able to hit its 2% target in roughly five years. If the Fed were to lose the public's trust on maintaining price stability, it could lead to an inflationary doom loop.
Despite Buffett's desire for lower inflation, he signaled Tuesday that he cares more about the stability of the banking systems. Buffett also expressed his support for Fed Chair Jerome Powell's overall performance leading the central bank in recent years. He especially praised Powell's leadership during the wake of the Covid-19 pandemic, in which the Fed stepped in to cut rates quickly, keep credit flowing, and shore up the financial system.
"If he'd waited two or three weeks, it would have been a disaster. Once the dominoes start toppling, they just start toppling -- and that line is shorter than anybody thinks," Buffett said of Powell's actions. "I think he did exactly the right thing."
Buffett added that Powell and former Fed chair Paul Volcker are his "heroes" at the Fed.
Write to Megan Leonhardt at megan.leonhardt@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 31, 2026 13:41 ET (17:41 GMT)
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