A Higher Inflation Target Won't Make the Fed More Effective

davfor

Here is a look at policy changes taking place at the Fed. It is getting close to concluding we will be living in a low interest rate world for some time to come:

U.S. central bankers ... will draw on both internal and external inputs and ... consider “whether to allow inflation to rise above their 2 percent target more often as they grapple with the likelihood that interest rates are likely to remain much lower than in the past.”

...there is an argument for letting this happen in order to build greater flexibility in the Fed's tool kit for responding to the possibility – some would say, the likelihood – of a significant growth downturn down the road.

One of the biggest concerns is the risk of future financial instability. That threat will increase if, in the next year, Congress and the administration fail to agree on new pro-growth initiatives (an infrastructure program, for example).

The adoption of pro-growth measures in the form of deregulation and tax cuts has reduced some of the Fed’s policy burden but, as highlighted by last month’s dramatic policy pivot, has not eliminated the tricky codependence with markets.

https://bloomberg.com/opinion/articles/2019-02-25/breaching-2-inflation-target-won-t-make-fed-more-effective

hank

@davfor, Thanks for the Bloomberg article. I was about to post a related article when noticed yours.

Paywall @ WSJ. But was able to obtain a short excerpt:

"Federal Reserve officials are considering whether to allow the 'cost of living' to rise above their 2% target more often as they grapple with the likelihood that interest rates are likely to remain much lower than in the past...A policy framework that is more relaxed about a higher 'cost of living' would be one way to signal the Fed's commitment to taking bolder action to boost growth after a recession...The risk that Americans could start expecting the 'cost of living' to languish below 2% 'calls for a reassessment of the dominant 'cost of living' targeting framework,' NY Fed President John Williams said Friday at a conference in New York."
https://www.wsj.com/articles/fed-embarks-on-a-rethink-of-its-inflation-target-11551016801

I might have chosen a “jazzier” title for the thread like:
-- Fed Pushes to Boost Inflation OR
-- Consumers Need to Pay More Says Fed Official