“Targeting Inflation at 2% Is Too Low” – DeLong

“First, the question is not whether the Federal Reserve should raise its target inflation rate above 2% per year. The question is whether the Federal Reserve should raise its target inflation rate to 2% per year. On Wednesday afternoon, the Federal Reserve chairman, Ben Bernanke, stated that he was unwilling to undertake more stimulative policies because “it is not clear we can get substantial improvements in payrolls without some additional inflation risks”. But the PCE deflator excluding food and energy has not seen a 2% per year growth rate since late 2008: over the past four quarters it has grown at only 0.9%. At a 3.5% real GDP growth rate, unemployment is still likely to be at 8.4% at the end of 2011 and 8.0% at the end of 2012—neither of them levels of unemployment that would put any upward pressure on wage inflation. It thus looks as though 1% is the new 2%: on current Federal Reserve policy, we are looking forward to a likely 1% core inflation rate for at least another year, and more likely three. A Federal Reserve that was targeting a 2% per year inflation rate would be aggressively upping the ante on its stimulative policies right now. That is not what the Federal Reserve is doing. Would that we had a 2% per year inflation target.” Read more.

“Targeting Inflation at 2% Is Too Low”
Brad DeLong
Seeking Alpha, May 4, 2011.

(I thought I would provide a view of the alternative argument to Sound Money.)

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