The Fed has an inflation problem.
The CPI is running well above the mythical 2% target and there isn’t any sign that it will ease soon. To deal with this problem, the central bank should tighten its monetary policy. But that would create a whole new problem, given that it can’t tighten in this economic environment. So, what is a central banker to do?
Well, if the Fed can’t hit the target, how about just moving the target?
That idea is apparently seriously being considered.
In a Wall Street Journal article, Greg Ip floated the idea.
One strategy [Powell]—or his successor—should consider in that eventuality is to simply raise the target.”
Ip buys into Keynesian economic voodoo and thinks straitjacketing the Fed with a 2% inflation target will hinder job creation.
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.”
In a sense, the Fed has already raised the inflation target. Not so long ago, it was a hard 2% target. But the COVID-19 pandemic gave the Fed just the excuse it needed to move the inflation goalposts.
Jerome Powell announced the shift to “average inflation targeting” during his Jackson Hole speech in August 2020. In effect, the Fed will allow the CPI to run “moderately” over 2% “for some time” to balance out periods where it runs under that level.
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