ON SEPTEMBER 17th the Federal Reserve will conclude a two-day, rate-setting meeting at which it just might raise its benchmark interest rate for the first time in more than nine years. Arguing in favour of a hike is the low unemployment rate, which fell to 5.1% in August. Arguing against it is the rate of inflation which, having come in at 0.3% year-on-year in July, is well below the 2% target that is the lodestar of Fed policy. But why does the Fed want 2% inflation in the first place? Central banks are responsible for monetary policy: roughly speaking, the job of controlling the amount of money that courses through the economy. For a long time, monetary policy consisted of little more than stabilisation of the exchange rate, which was often fixed (eg by the gold standard at the beginning of the 20th century) in order to facilitate international commerce. But exchange rates proved a poor target for policymakers. Pulling money out of the economy to buoy the currency and protect the exchange rate could send the economy into a tailspin; such policies helped create the Depression of the 1930s. After the Depression governments prioritised domestic employment. Central banks reckoned the economy followed a relationship known as the Phillips curve, which posits a trade-off between inflation and unemployment; governments could have less of one if they were prepared to accept more of the other. Yet amid the "stagflation" of the 1970s, an unholy mixture of economic stagnation with inflation, economists realised that this relationship weakened over time, as people figured out what was going on and revised their expectations for future inflation. The stimulative effect of faster price growth faded, leaving economies with both high inflation and high unemployment. Economists realised the best a central bank could do to boost long-run growth was to make the path of policy clear and predictable to the public.

To do that, central banks needed to select an economic variable to set as a target: one linked to the health of the economy and over which the central bank could exercise some control. A clear, public target would keep central banks disciplined and help stabilise the economy (markets would anticipate easier policy when the economy looked like it was falling short of the target, for instance, and increased spending and investment would therefore help the central bank push the economy back on the right course). Milton Friedman, a Nobel-prize-winning economist, reckoned central banks should aim for growth in the money supply. Central banks tried that for a while, but found that when they made money growth their target the relationship between it and the health of the economy broke down, just as the Phillips curve had. Many then settled on an inflation target. Inflation was readily observable and, it was thought, was a reliable thermostat for an economy. The central bank of New Zealand was the first to adopt an inflation target, in 1990. The Fed pursued an unofficial inflation target over a long period, only making its policy official in January of 2012, when it announced that it thought a policy which targets a 2% rate of inflation "is most consistent over the longer run with the Federal Reserve's statutory mandate".