Following today's meeting, the Fed annoinced that it adopted a policy of inflation targeting, with a long-term goal of 2% inflation. This formalizes the informal target already employed by the Fed and follows the pattern of many other central banks around the world (Australia, Canada, New Zealand, United Kingdom, Euro area, etc.). In most cases, their goal is also 2% inflation (or close to 2%).
Some may ask - why not 0%? There are several reasons, but perhaps the biggest is the fear of deflation. Once it takes root, deflation is hard to stop and tends to lead to a cycle of economic weakness (think Japan or the US' last bout with deflation - the Great Depression). Most central banks in developed countries have chosen to target a rate of 2% to provide a cushion against possible deflation while maintaining a low and stable inflation rate. Unlike most other central banks that target inflation, the Fed continues to have a dual mandate of maintaining full employment; something only Congress can change.
There are several ways to estimate inflation. The one chosen by the Fed is the personal consumption expenditure (PCE) index, which has been recognized by most economists as the best gauge of consumer inflation since, among other reasons, it reflects recent spending patterns as opposed to an old survey (like the consumer price index). It's important to note that this policy does not mean the Fed will seek to keep inflation at 2% all the time, but instead will seek to keep inflation close to 2% per year over time. For example, if energy prices experience a temporary spike, causing inflation to temporarily rise above 2%, the Fed may not respond if it anticipates inflation will return to its target.
By the way, one of the leading proponents of inflation targeting has been Ben Bernanke (link to article by Bernanke from 1997). Despite what many in the blogosphere think, Ben Bernanke has been a long-term advocate of low and stable inflation. That doesn't mean his policies are perfect, but he is not seeking to implement policies that result in high inflation.
