Rep. Ro Khanna (D-CA) has questioned the Federal Reserve’s 2% inflation target which the central bank has been targeting and defending vehemently in the wake of widespread calls for the need to have a re-look.
“Who set the Fed’s 2% target rate? Why is it sacrosanct as opposed to setting it at 3% given the modern need for strategic reshoring, decarbonization, and wage increases for the working class? Would love Econ Twitter to chime in why we can’t land the plan[e] softly at 3%,” Khanna said in his tweet.
The current inflation rate sits above 4% as the interest rate has been coming down in order to prepare for its target rate.
Fed Chair Jerome Powell has defended the inflation target in the past saying how it has helped anchor price rises. In his semi-annual testimony before the Senate Banking Committee in March, Powell asserted it’s really important to stick to the 2% inflation target and not consider changing it.
“The modern belief is that people’s expectations about inflation actually have a real effect on inflation. If you expect inflation to go up 5% then it will,” said Powell, according to a Reuters report.
Even during last week’s testimony before the Committee on Financial Services, Powell said the Fed remains committed to bringing inflation back down to its 2% goal and to keeping longer-term inflation expectations well anchored.
Brad Gerstner, CEO of Altimeter Capital, responded to Khanna’s tweet saying there’s nothing magical about 2% vs. 3% and that the Fed knows it. “At 3% we inflate away the debt a bit faster, but the Fed can’t adjust the target without a big risk to credibility – which could spike the cost of future gov’t borrowing. So “jawbone but tolerate” seems like a good balance,” he said in his tweet.
Given where the economy is and taking into account the current circumstances, many others, too, hold the same view as Khanna. Experts like Allianz chief economic adviser Mohamed El-Erian have argued that the central bank’s inflation target should be updated.
“We are now living in a world of supply constraints and if we were to formulate a new inflation target, it will be higher than 2% — it will be more like 3%,” El-Erian had said.
Treasury Secretary Janet Yellen, however, noted it was not the appropriate time for such a debate. “We could have a lovely debate for what the inflation target would be,” Yellen said last week. “But this is not the time for that debate.”
Produced in association with Benzinga
Edited by Alberto Arellano and Joseph Hammond
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