Fed Shouldn’t Raise Its Inflation Target

 Some people are suggesting that the Federal Reserve consider a compromise in its battle with rising prices: Instead of imposing the full monetary tightening required to get inflation back down to its 2% target, why not increase the target a bit?

The central bank last changed its inflation objective quite recently, in August 2020. 

Previously, the Fed had tried to hit the 2% target at all times, regardless of past performance. 

Under its revised monetary policy framework, it would seek to achieve an average of 2%. 

Past misses would no longer be treated as “bygones,” but instead offset by misses on the other side, to keep inflation expectations well anchored at 2%. 

Inflation is too high. This has caused some prominent economists, including Olivier Blanchard and Jason Furman, to ask: What’s so special about a 2% inflation target in the first place? Why not 3%, or even higher?

A higher target would result in a higher peak in nominal interest rates during economic expansions.  This would create more room to cut rates during downturns, reducing the risk of getting pinned at the zero lower bound and lessening the need to use other monetary policy tools such as quantitative easing and forward guidance.

 I believe the Fed has already subtly raised its inflation objective. When Chair Jerome Powell talks about getting inflation back to 2%, there’s no mention of going below 2% to offset recent persistent overshoots. 

Bill Dudley Bloomberg 28 november 2022 

https://www.bloomberg.com/opinion/articles/2022-11-28/the-fed-shouldn-t-raise-its-inflation-target 

Rolf Englund: 

Om centralbankerna inte kunde få upp inflationen från noll till två, hur kan då någon tro att de inom rimlig tid skall få ner den från 8-10 procent till två?