Too Much Inflation? Just Raise The Inflation Target!

One strategy [Powell]—or his successor—should consider in that eventuality is to simply raise the target.

And why pursue higher inflation? Ip takes the popular view of the “mythical trade-off between higher employment and inflation”—as Brendan Brown describes it. For Ip, higher inflation is the way to ensure an employment-fueled expansion, and he writes:

Why would higher inflation ever be a good thing? Economic theory says modestly higher, stable inflation should mean fewer and less severe recessions, and less need for exotic tools such as central-bank bond buying, which may inflate asset bubbles. More practically, if inflation ends up closer to 3% than 2% next year, raising the target would relieve the Fed of jacking up interest rates to get inflation down, destroying jobs in the process.

According to Ip, the too-low two-percent target places the Fed in a straight jacket. The Fed needs more room to breathe. Rather than feel the pressure to taper just because price inflation has risen above the two-percent target, Ip wants to make sure the Fed can just keep on with the stimulus until price inflation exceeds three percent, or maybe even four percent. And who knows? After that, maybe “economic theory” will tell us that five percent inflation is an even better target. Certainly, that would be no less arbitrary a number than four percent or two percent.

But it’s a safe bet that if the accepted inflation target were four percent, we’d be hearing little-to-nothing right now about tapering, normalization, or any other effort to cut price inflation. The Fed would then be more free to keep the easy-money spigot open longer without having to hear complaints that the Fed had “lost control” of price inflation. That would be great for stock prices and real estate prices. Ordinary people, on the other hand, might fare less well

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