Two Percent Is Not Enough: I’m being asked for comments on the Fed’s low-rates-until-2014 announcement. It’s a step in the right direction — and it has had a visible effect on markets, pushing long-term rates down, which is all good.
But why is the inflation target only 2 percent?
Actually, I understand why; the inflation hawks are still a powerful force that must be appeased. But the truth is that recent experience has made an overwhelming case for the proposition that the 2 percent or so implicit target prior to the Great Recession was too low, that 4 or 5 percent would be much better. Even the chief economist at the IMF says so. (OK, in real life it’s Olivier Blanchard, who is a very smart and also flexible-minded macroeconomist who just happens to be at the IMF for now — and I’m glad that he is!)
The thing is, if we’re going to lock in a formal inflation target, now would be a good time to get it right, instead of waiting until the memory of the crisis fades and everyone gets complacent again.
So this isn’t the Fed policy transformation we’ve been waiting for. But better than nothing.