Economists who want the target to rise to 3% ignore the harm

Also like Frankenstein’s monster, the target has since taken on a life of its own as some economists have come to treat inflation as a tool to be used rather than a problem to be solved. This finds expression in the most common technical justification for a higher target: that it leaves the central bank more scope to cure recessions by cutting interest rates.

The Fed flirted with a version of a higher inflation target on the sly in August 2020, when Mr. Powell introduced a “flexible average inflation target” under which the Fed would allow periods of above-2% inflation to compensate for earlier periods of lower inflation. 

Of particular import these days is the willful blindness to asset prices. 

A single-minded pursuit of a consumer-price-inflation target during periods when inflation was consistently below 2% led to the lower-for-longer interest-rate policy and quantitative easing that have inflated a variety of asset bubbles. 

These bubbles now pose a greater threat to the economy than the bogeyman of mild consumer-price deflation ever did.

Joseph C. Sternberg Wall Street Journal 24 August 2023

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