The Fed should raise its inflation target to boost employment

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Anyone who has tried archery knows that there is a simple solution for the arrows that regularly fall away from the target – aim higher.

That's just the situation in which the Federal Reserve officials find themselves. And some seem, albeit too gradually, to learn their lesson.

The Fed, which has not reached its 2% inflation target for much of the recovery after the Great Recession, is currently undertaking a monetary policy review. "strategy, tools and communication" led by Vice President Richard Clarida.

Officials recognize that with interest rates of only 2% and unlikely to fall much higher if at all given weaker economic conditions, they will have little leeway to reduce costs the next recession hits before hitting again at zero. This will force policymakers to buy large amounts of bonds again, a policy that has proved effective but controversial during the last downturn.

If the Fed had set a higher inflation target in the 2007-2009 slump, policymakers would have been forced to react earlier and more aggressively to the downturn, likely reducing its severity and duration.

In addition, politicians reportedly refrained from raising rates in the last two years, despite indications that, despite the low unemployment rate, the wages of most workers have not yet increased significantly, which is certainly not enough to make up for lost time during the recession.

Low inflation seems to be a good thing, and it is generally the case. But stagnant inflation, or even worse, a persistent cycle of falling prices and wages, known as deflation (with which the economy has flirted during the financial crisis), is the surest sign of a weak economy. -performante.

Importantly, the downside of a disinflationary economy is a chronically weak labor market, where workers lacks the bargaining power ask for increases, and so Inequality increases.

In addition, central banks know what to do if inflation escapes control – they can raise interest rates. They are sometimes compared to cuts when the economy goes crazy and no one wants to borrow "push on a string" for lack of power.

By heating the economy warmer than it has been in recent decades, the central bank could allow the creation of more jobs without causing major problems. More importantly, those who would benefit most from such a policy would be those who bottom of the income scale, many of which are largely excluded from the benefits of growth, even in decent time.

"It is generally believed that central banks have effective tools to prevent persistent overshooting of inflation, but the lower effective interest rate limit makes persistent overvaluation more likely," Clarida said in a statement. February speech describing the revision of the framework.

"Lack of persistent inflation& nbsp;carry the risk that long-term inflation expectations become muddy or become anchored below the stated inflation target. "

Clarida says the criticism "will be wide, and we will not prejudge where that will take us," suggesting that the end result is really a work in progress.

As a person who grew up in the 1980s with a hyperinflationary Brazilian economy, I offer two cents: we are no longer in Rio – It is time for the Fed to adopt a higher inflation target.

What is the correct number exactly? Two percent were chosen rather randomly, a trend that started in New Zealand and was later adopted by other imitative central bankers and in search of a consensus.

Let's start with 4%, as a former IMF economist Olivier Blanchard suggestedand see what happens.

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Anyone who has tried archery knows that there is a simple solution for the arrows that regularly fall away from the target – aim higher.

That's just the situation in which the Federal Reserve officials find themselves. And some seem, albeit too gradually, to learn their lesson.

The Fed, which has not achieved its 2% inflation target for much of the recovery that followed the Great Recession, is currently undertaking a review of its "strategy, tools and communications" on monetary policy, led by Vice President Richard Clarida.

The authorities recognize that with interest rates of barely 2% and that it is unlikely that they will increase significantly if economic conditions deteriorate, they only have the advantage. There is little room for maneuver to reduce borrowing costs when the next recession occurs before returning to zero. This will force policymakers to buy large amounts of bonds again, a policy that has proved effective but controversial during the last downturn.

If the Fed had set a higher inflation target in the 2007-2009 slump, policymakers would have been forced to react earlier and more aggressively to the downturn, likely reducing its severity and duration.

In addition, politicians reportedly refrained from raising rates in the last two years, despite indications that, despite the low unemployment rate, the wages of most workers have not yet increased significantly, which is certainly not enough to make up for lost time during the recession.

Low inflation seems to be a good thing, and it is generally the case. But stagnant inflation, or even worse, a persistent cycle of falling prices and wages, known as deflation (with which the economy has flirted during the financial crisis), is the surest sign of a weak economy. -performante.

It is important to note that the downside of a disinflationary economy is a chronically weak labor market, where workers do not have the power to bargain for increases, and so inequality increases.

In addition, central banks know what to do if inflation escapes control – they can raise interest rates. Cutting them when the economy is out of control and no one wants to borrow is sometimes compared to "pushing on a string" for lack of power.

By heating the economy warmer than it has been in recent decades, the central bank could allow the creation of more jobs without causing major problems. It is important to note that those who will benefit the most from such a policy would be those at the bottom of the income ladder, many of whom are largely excluded from the benefits of growth, even in good times.

"It is generally believed that central banks have effective tools to prevent persistent surcharges from inflation, but the lower effective interest rate limit increases the likelihood of persistent overvaluation," Clarida said in a February speech describing the revision of the framework.

"Persistent inflation deficits carry the risk that long-term inflation expectations become muddy or become anchored below the stated inflation target. "

Clarida said the review will be "far reaching, and we will not prejudge its evolution", suggesting that the end result is really a work in progress.

As a person who grew up in the 1980s with a hyperinflationary Brazilian economy, I offer two cents: we are no longer in Rio – It is time for the Fed to adopt a higher inflation target.

What is the correct number exactly? Two percent were randomly chosen, a trend that began in New Zealand and was then adopted by other imitative central bankers and in search of a consensus.

Let's start with 4%, as Olivier Blanchard, a former IMF economist suggested, and see what happens.