Some economists think 4% would give the Fed more room to get out of downturns
Low inflation, extremely low interest rates and the tepid economic recovery following the 2008 financial crisis had led some prominent economists to push for a much higher target inflation rate than 2%.
The problem, as they saw it, was that the real natural interest rate—the inflation-adjusted rate that was just right to keep the economy running smoothly—had fallen.
If a recession hit, the Fed didn’t have much scope for cutting rates before hitting zero.
This “zero lower bound” problem meant that the Fed would need to turn to less potent ways to stimulate the economy, such as asset purchases.
As a result, economic recovery would be halting, with millions of workers again cast into long periods of joblessness.
Olivier Blanchard, then the chief economist of the International Monetary Fund, in 2010 suggested a 4% target would do the trick.
Even as the Fed’s favored inflation measure has moderated from the 7.1% hit in June 2022, prices are far higher than they were before the pandemic.
Blanchard, now at Peterson Institute for International Economics, thinks the Fed should eventually raise the inflation target to help insure against future zero-bound problems. But for the sake of the Fed’s credibility, he reckons inflation needs to get to 2% before that can happen.
Laurence Ball of Johns Hopkins is sticking to his guns on a higher inflation target.
“I think if people were used to a world of 4% inflation and that was the norm they would not be especially unhappy about it,” he said.
Policymakers could leave their 2% target in place formally, but be all right with never quite getting there. And then some years down the line, they could adopt a higher target.
Justin Lahart Wall Street Journal 9 June 2024
Nouriel Roubini says a return to 2% inflation is ‘mission impossible’
The new normal may be somewhere between 3% and 4% for advanced economies over time
Som sig bör är det IMFs chefsekonom, Olivier Blanchard, som har tänkt först, more or less.
Det har väckt viss uppmärksamhet att han har föreslagit att inflationsmålet bör höjas, från runt två till kanske runt fyra procent.
Kommentarer