Don’t Raise the Target; Change the Framework
Inflation targeting has been a cornerstone of the Federal Reserve’s monetary policy for several years. Recent murmurs within the Fed, however, suggest some would like to revisit the 2 percent inflation target. Michael S. Derby reports on the discussion, highlighting the rationale behind this potential adjustment.
The Federal Reserve’s desire to minimize financial stress while managing disinflation is the primary motivation for revisiting the inflation target. With recent instances of bank failures and concerns about the potential impact of interest rate hikes, a higher inflation target would allow the Fed to strike a balance between controlling inflation and avoiding unnecessary economic turbulence. Translation: It would allow the Fed to reduce interest rates sooner. The current 2 percent inflation target, which was formally adopted in 2012, has not produced the desired results. From 2012 to 2020, inflation was generally below 2 percent. With this in mind, the Fed moved to an asymmetric average inflation target in August 2020. In the time since, inflation has generally been above 2 percent. Rather than improving the system, the Fed’s move to an asymmetric average inflation target has just swapped one set of errors for another.