The Fed is currently grappling with inflation, but two former Fed senior staff believe that persistently higher prices in the future may be needed for the economy as a whole to shift to higher levels and lead to job prosperity.
Once the COVID-19 epidemic is over and the Fed is able to raise interest rates to more normal levels, the Fed should raise its inflation target from 2% to 3% and use shock therapy to cut interest rates unexpectedly, David Reifschneider, a special adviser to David Wilcox and former Fed chair Janet Yellen, said in a new research paper.
Wilcox and Reifschneider estimated, "in the announcement of more Qualcomm IncIn the first 15 years after the inflation target, the unemployment rate is likely to be on average 0.75 percentage points or more below its sustainable level, "which means about 1.2 million or more jobs are created each year.
"when the labour market is most tense, people attracted to the labour market come from marginalized groups," they wrote in their paper, and allowing higher inflation "also helps to reduce race and other inequalities." extend people's employment time and give them more experience and training.
Wilcox and Reifschneider argue that the risk of a financial bubble caused by easy credit or a recession caused by interest rate hikes to counter surging inflation is manageable, and they believe it is worthwhile to achieve such a "transitional job and output boom" in this way.
The PCE price index, the Fed's closely watched core gauge of inflation, rose 3.5 per cent in June from a year earlier, sparking a debate in the market about whether the Fed might need to raise interest rates earlier.
While the 2 per cent inflation target is widely considered reasonable, the Fed has failed to raise inflation to that level over the past decade, leading it to announce that it will temporarily allow inflation to be higher for "some time" to meet its average target.
Many top economists believe the Fed should take further action and permanently raise its inflation target.
The 2 per cent inflation target was set at a time when global interest rates were lower, bringing the Fed's benchmark overnight interest rate closer to the "zero floor" and leaving less room for interest rates to be cut to cope with recession and economic downturn. as a result, unconventional instruments such as bond purchases have become a normal part of the Fed's toolbox. During the economic downturn triggered by the COVID-19 epidemic, for example, the Fed not only cut policy interest rates to near zero, but also began buying $120 billion a month to further lower borrowing costs.
The standard argument for a higher inflation target is for the Fed to raise its policy interest rate and provide more flexibility to respond to any slowdown by cutting interest rates alone.
Wilcox and Reifschneider put forward a different argument: announcing a higher inflation target, coupled with actions such as interest rate cuts, will generate lasting economic benefits.
They point out that the Fed's new framework promises to be reviewed in five years' time, by which time the current surge in inflation will have subsided, unemployment will be slightly below its sustainable level, and will be even lower after further policy changes.
"many researchers have pointed out that if central banks around the world individually or together raise their inflation targets, they can do better in the long run in keeping inflation near their targets and keeping the labour force fully employed," Wilcox and Reifschneider wrote.